Warranty and price optimization in a competitive duopoly supply chain with parallel importation

Gray market has always been an opposing challenge for manufacturers. Parallel markets tend to purchase the manufacturer's product at a lower price and resell it in another market with a higher price. In order to ameliorate the effects of parallel importation, the offering of a warranty for authorized channels is suggested as a competitive strategy. This paper considers two markets with different levels of willingness to pay. A manufacturer is present at both of these markets and offers the same product with different prices according to each market's willingness to pay. In the market with a lower willingness to pay, the manufacturer's product is not only purchased by a group of customers, but also by the parallel importer who later attempts to sell this product in the market with a higher willingness to pay. Moreover, in the market with lower willingness to pay, the manufacturer competes with another manufacturer that offers a similar product. A model for this problem is proposed when the manufacturer offers warranty as a competitive strategy against the parallel importer at the market with higher willingness to pay. Furthermore, a numerical example and a sensitivity analysis for the model are presented. Additionally, due to the practicality of this problem, managerial insights are included at the end of this research work.