Pricing decisions in a strategic single retailer/dual suppliers setting under order size constraints

Abstract

In this paper, we study a duopolistic market of suppliers competing for the business of a retailer. The retailer sets the order cycle and quantities from each supplier to minimize its annual costs. Different from other studies in the literature, our work simultaneously considers the order size restriction and the benefit of order consolidation, and shows non-trivial pricing behaviour of the suppliers under different settings. Under asymmetric information setting, we formulate the pricing problem of the preferred supplier as a non-linear programming problem and use Karush–Kuhn–Tucker conditions to find the optimal solution. In general, unless the preferred supplier has high-order size limit, it prefers sharing the market with its competitor when retailer’s demand, benefit of order consolidation or fixed cost of ordering from the preferred supplier is high. We model the symmetric information setting as a two-agent non-zero sum pricing game and establish the equilibrium conditions. We show that a supplier might set a ‘threshold price’ to capture the entire market if its per unit fixed ordering cost is sufficiently small. Finally, we prove that there exists a joint-order Nash equilibrium only if the suppliers set identical prices low enough to make the retailer place full-size orders from both.