Duopolistic price competition in a VMI-Consignment agreement with brand substitution

In a duopolistic market where goods are consigned under a Vendor Managed Inventory setting, the two manufacturers engage in a price competition to capture the larger percentage of the market. Since they are able to dictate the market price of their goods, the retailer is not in any way able to change the prices set by the respective suppliers. When this happens, the retailer acts as a mere selling space of goods and point of competition among suppliers. The intensity of competition is investigated in this paper, where price competition with the consideration of brand substitution is analyzed with respect to the decisions that are made by each manufacturer. In considering the possible action and reaction scenarios that could take place across different inventory cycles, significant factor interactions are identified and analyzed as to how it affects mean profit and pricing and reorder decisions available to the manufacturer. As manufacturer make discounting decisions in terms of price and time of discount, and reorder point quantities across time, the optimal decisions as well as its sequence of implementation can be viewed as sequential decision process that can be modeled as a Dynamic Programming model. Review of Related Literature from as early as 19977 suggest that different market situations can be analyzed using this technique as discussed by Hovinen (1977). Competitive measures as well as eventual counteractions by competitors were simulated, similar to how other studies considered action-and-reaction of players in the competition. The main validation for the model is done through a response surface methodology experiment to find out the main factors contributing to the behavior of the decisions and its corresponding mean profit. The significant factor interactions identified from the process was considered to come up with the policies that can be used to guide the manufacturers in the said competitive environment