Dynamic Pricing in a Distribution Channel in the Presence of Switching Costs

Abstract

We advance the literature on dynamic oligopoly pricing models in the presence of switching costs by additionally modeling the strategic pricing role of the retailer within the distribution channel. In doing this, we study the relative dynamic pricing implications of how current retail and wholesale prices for a brand must optimally take into account past and future demand, respectively, for the brand. Using scanner data from the cola market, we find that while the retailer exploits the benefit of inertial demand by appropriately increasing the retail profit margin, the cost of investing is borne entirely by the manufacturers. We use simulation studies to show how the retailer will lose its ability to leverage the benefits of inertial demand as consumers become more price sensitive. We also show that when inertia of the more price-sensitive customer segment increases, the aggregate welfare of consumers, the retailer, and manufacturers may increase. Data, as supplemental material, are available at https://doi.org/10.1287/mnsc.2016.2649 . This paper was accepted by J. Miguel Villas-Boas, marketing.

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