Pricing and replenishment policies in dual-channel supply chain under continuous unit cost decrease

- We consider dual-channel for product that experiences continuous unit cost decrease.
- Channel preference has significant impact on profitable coexistence of dual-channel.
- Retailer's high set up cost may lead to non-existence of online channel.
- Higher/lower retail price than online price is dependent on product compatibility.
- Profit sharing through wholesale price adjustment resolves channel conflict.

This paper explores pricing and replenishment policies for a high-tech product in a dual-channel supply chain that consists of a brick-and-mortar channel and an internet channel. The unit cost of the product decreases over its short life cycle. Assuming the manufacturer as the Stackelberg leader, the optimal pricing and replenishment policy is analysed mathematically. It is found that there is a severe price competition between the retail and online channel, and product compatibility has a significant impact on the pricing policy. In particular (i) customers' higher retail channel preference above a threshold leads to non-coexistence of dual-channel, (ii) the dual-channel is non-profitable for product compatibility outside an interval and (iii) higher or lower retail price in comparison to online price is dependent on product compatibility. Also, the retailer's higher setup cost may lead to non-existence of online channel. Finally, a profit sharing mechanism through wholesale price adjustment resolves channel conflict. A numerical example is illustrated to justify our proposed model.