Optimal Variety and Pricing Decisions of a Supply Chain With Economies of Scope

Abstract

Motivated by observations that consumers demand product variety and scope economies or diseconomies for multiple products are prevalent, we develop two supply chain models under different channel leaderships, namely the retailer(-led) Stackelberg (RS) model and manufacturer(-led) Stackelberg (MS) model, to address the issues on product variety and pricing. In the RS case, we find that if it is not too costly to increase variety, the manufacturer's profit increases with diseconomies of scope, and it is optimal to provide a greater variety than the variety just covering the market under the centralized supply chain, while the decentralized supply chain provides a variety level just covering the market; however, the variety under the decentralized supply chain is greater than that under the centralized system. In addition, a higher shelf cost for the retailer strengthens the double marginalization effect. For the MS model, when we compare it with the RS model, we find that the retail price under the MS model is higher than that under the RS model, while the variety level under the MS model is higher when scope economies exist and whether variety and channel profit under the MS model are higher highly depends on shelf cost and marginal variety cost.

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