Contract mechanisms for coordinating pricing strategies in a supply chain with two consumer segments

This paper addresses pricing strategies in a serial supply chain (SC) consisting of a single Buyer, a single Supplier and where the end-consumers are comprised of two segments, each with a different willingness-to-pay. Under the assumption that the final demand and the segments’ willingness-to-pay are deterministic, sub-optimization occurs when the decisions on pricing strategies are decentralized. That is, for a wide range of parameter values, a decentralized SC set a higher price and selling to the high willingness-to-pay segment whereas setting a low price and selling to both the segments would have been more profitable for the SC as a whole. To overcome this issue, two coordinating mechanisms, namely revenue sharing and modified resale price maintenance (mRPM), are analyzed within the above SC setting. It is shown that for all parameter values there exist revenue sharing contracts and mRPM contracts, which can both coordinate the SC and lead to win-win opportunities