Stackelberg Game-Theoretic Approach in Joint Pricing and Assortment Optimizing for Small-Scale Online Retailers: Seller-Buyer Supply Chain Case

Abstract

Assortment planning is one of the fundamental and complex decisions for online retailers. The complexity of this problem is increasing while considering demand and supply uncertainties in assortment planning (AP). However, this leads to more efficient results in today's uncertain markets. In this paper, the supplier and E-tailer interactions are modeled by the non-cooperative game theory model. As small-scale online retailers opposed to bricks and mortar usually have lower power in front of suppliers, we propose a Stackelberg or leader-follower game model. First, the supplier as a leader announces its decisions regarding selling price to the E-tailer. Consequently, the E-tailer reacts by determining the purchase quantity, selling price to the customers and assortment size. Various scenarios are presented and analyzed to show the effectiveness of the Stackelberg game model in simulating the interactions between small-scale online retailers and a powerful supplier.