Pricing and effort investment decisions of a supply chain considering customer satisfaction

Abstract

This paper develops a two-period game model of a supply chain consisting of one manufacturer and one retailer to investigate the pricing and effort investment decisions when customer satisfaction is considered. We assume that both players are risk averse and divide the retailer's effort into short-term selling effort and customer-satisfying (CS) effort, where short-term selling effort only influences current demand and CS effort only influences future demand in the next period. We find that the pricing and effort investment decisions and the certainty equivalents of the random present profits largely depend on risk sensitivity, demand uncertainty, correlation coefficient between the errors of the market scales in two periods, discount factor and subsidy rate. When the patience/discount factor or the CS effort sensitivity of the retailer increases, the retailer will increase CS effort investment. The retail price and effort investments of the retailer and the unit wholesale price of the manufacturer are decreasing in correlation coefficient due to a higher risk cost.

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