Abstract
We propose a stochastic differential game between a manufacturer and a retailer to investigate how the risk of facing a product recall impacts pricing strategies in marketing channels. By doing so, we analyze whether vendor agreements between manufacturers and retailers, which are signed before any unit is sold, could distort channel profits by aggravating double marginalization. We characterize the equilibrium pricing strategies in closed form for both linear and quadratic costs of recall. We find that the manufacturer and the retailer respond differently to certain clauses of the vendor agreement, but that in equilibrium, such agreements do not distort channel profit, even when costs of recall are quadratic.
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For instance, when χ = 0.001, ρ = 0.05, α = 1, δ = 0.01, κ M = 0.1 and κ R = 0.1, then S 2 − N 2 < 0; however, changing κ M from 0.1 to 0.15 yields S 2 − N 2 > 0.
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Rubel, O. (2020). Product Recalls and Channel Pricing. In: Pineau, PO., Sigué, S., Taboubi, S. (eds) Games in Management Science. International Series in Operations Research & Management Science, vol 280. Springer, Cham. https://doi.org/10.1007/978-3-030-19107-8_5
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DOI: https://doi.org/10.1007/978-3-030-19107-8_5
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