Revelation mechanism and decoy strategy for a supply chain with consumer's perceived substitutability

The decoy effect has been proven to be effective in simplifying choice and improving consumer outcomes in a regular choice context. This paper examines two decoy strategies in the presence of the consumer's perceived substitutability, namely decoy low-quality product strategy in a mixed bundling (strategy DL) and decoy high-quality product strategy in a mixed bundling (strategy DH). The manufacturer offers a menu of contracts to induce the retailer to report the information truthfully and choose one of the decoy strategies. Under symmetric information, we find that: (i) if the unit production cost of a high-quality product is low, the manufacturer and the retailer benefit more from strategy DL; otherwise, they benefit more from strategy DH. By investigating asymmetric scenario, we find that: (ii) under both strategies, the high-type retailer has no incentive to report wrong information while the low-type retailer may distort information, and both types of retailers have incentive to opt for a wrong strategy; (iii) under asymmetric information, the manufacturer is willing to design a menu of wholesale price-order quantity contracts to induce the retailer to report true information and opt for a correct strategy, and information asymmetry decreases the wholesale prices but increases the order quantities. Finally, we examine the impact of some key factors on the manufacturer's strategy choice and find that: (iv) if the high type consumer's perceived substitutability is low, the manufacturer will induce strategy DH; otherwise, the manufacturer will induce strategy DL; (v) when high-quality product's quality is high, the manufacturer will induce strategy DL if the probability of the low-type is low; otherwise, the manufacturer will induce strategy DH. When high-quality product's quality is low, the manufacturer benefits more from strategy DH.