Manufacturer’s encroachment strategies when facing the retail platform with AI-driven pricing

Abstract

The rapid development of artificial intelligence technology is facilitating the adoption of AI-driven personalized pricing. Retail platforms with a higher level of technology and a closer connection with consumers have taken the lead in adopting AI-driven pricing to improve pricing flexibility. In this paper, we explore the manufacturer’s encroachment strategies in the context of the retail platform’s adoption of AI-driven pricing by constructing a game-theoretic model, as well as clarifying the impact of the magnitude of AI capability on the profits of supply chain participants. We construct three channel structures, namely, a single-channel supply chain model without manufacturer encroachment, a dual-channel supply chain model with manufacturer uniform pricing encroachment, and a dual-channel supply chain model with manufacturer AI-driven pricing encroachment. The results show that manufacturer encroachment with uniform pricing does not lead to an increase in profit. However, the manufacturer can encroach with AI-driven pricing to gain benefits when the AI capability is high, the total cost of adding a direct channel and acquiring AI technology is low, and consumers’ valuation is high. We also find that increased AI capability benefits the manufacturer in any scenario, but not for the retail platform. In the single-channel scenario, enhanced AI capability can improve the retail platform’s profit if consumers’ valuation is relatively low. However, in the dual-channel scenarios where the manufacturer encroaches, enhanced AI capability is completely detrimental to the retail platform. This also brings a management insight to retail platforms that high AI capability may not necessarily boost profitability. Finally, we also conduct a case study to substantiate our claims.