Dynamic Pricing, Procurement, and Channel Coordination with Stochastic Learning

Abstract

We consider a decentralized two-period supply chain in which a manufacturer produces a product and sells it through a retailer facing a price-dependent demand. We assume that the second period production cost declines linearly in the first-period production, but with a random learning rate. As the mean and/or the standard deviation of the learning rate increase, the traditional double marginalization problem becomes more severe, leading to greater efficiency loss in the channel. We obtain revenue sharing contracts that can coordinate the dynamic supply chain. We study the effect of the revenue sharing rate on the wholesale prices in each of the two periods and on the splitting of the total supply chain profit between the channel members. Finally, we examine the impact of the mean and the standard deviation of the learning rate on the pricing strategies of the channel members, on the retailer’s procurement decisions, and on the structure of the revenue sharing contracts.

Keywords: Learning curve, learning-by-doing, pricing, inventory management, channel coordination, revenue sharing contracts

JEL Classification: C61