Price promotion with reference price effects in supply chain

•The reference price effects could mitigate “double marginalization” effects and improve channel efficiency.•Optimal price promotion benefits channel members in the integrated channel and the consumer promotion model.•While the manufacturer offers consumer promotion, the retailer will offer retailer promotion with certain conditions.•The more loyal the consumers are, the higher profits the channel members gain.

We consider the price promotion in a supply chain comprising one manufacturer and one retailer, who take into account the reference price effects of consumers. The problem is analyzed as a manufacturer-lead Stackelberg game. The results indicate that reference price effects could mitigate “double marginalization” effects, and improve the channel efficiency. We also show that the optimal price promotion benefits the manufacturer, retailer and consumers in consumer promotion model. Furthermore, we provide the conditions under which the retailer has an interest in offering price promotion to consumers. Finally, we employ numerical analysis to demonstrate more managerial insights.