Supply disruptions and the problem of pricing, advertising, and sourcing strategies in a retail duopoly market

Abstract

Retailers play a crucial role in the economy, and their ability to effectively manage supply disruptions can significantly impact their performance and competitiveness. This study delves into the complex dynamics of retail markets, particularly in duopoly settings, where two major retailers interact strategically to maximize their profits. The goal is to understand how supply disruptions influence not only pricing and advertising strategies but also sourcing decisions. Three game structures are presented to analyze interactions between retailers, aiming to maximize total profit by determining the optimal sale price and advertising investment. The paper introduces a mathematical formulation for these games and a methodology to find the optimal solution based on the sourcing strategy (single, dual, or multiple sourcing strategy).2

An extensive numerical example with discussion and sensitivity analysis is provided. The study's results can assist decision-makers in selecting the most appropriate sourcing strategy in the presence of disruptions. The optimal pricing and advertising investment in both disruption and non-disruption scenarios for retailers are identified. The study concludes that acting as the leader in the Stackelberg game rather than Nash leads to higher profits. Moreover, dual sourcing is more advantageous than multiple sourcing for retailers. The managerial insights offer useful recommendations for retailers to improve their position in the competitive market.