Dual role of price and myopia in a marketing channel

In this paper we study a dynamic two-player channel where the manufacturer controls the wholesale price and the investment in quality and the retailer chooses the retail price. We consider that the retail price affects both the demand and the perceived quality of the brand and that its variations contribute to the building of an internal reference price. One of the model’s distinctive features is that it accounts for the two meanings of price, i.e., its classical objective measure of the cost of acquiring a particular quantity of the product, and its subjective roles as an assessment of the quality of the product and an evaluation of gains or losses (deal vs. sacrifice) resulting from buying a “cheap” or an “expensive” product. This dual computation is done with respect to the internal reference price.Our objective is to investigate the impact of retailer’s myopia on the pricing strategies and payoffs of channel members in this context. A myopic retailer is an agent that disregards the effects of its pricing strategy on the evolution of the perceived brand quality and the reference price.

► First research to integrate different roles of price in a marketing channel.
► We model interplay between quality and reference price.
► We systematically study the impact of myopia on pricing decisions and profits.
► We characterize the conditions under which focusing on short-term sales can be optimal.