Pricing Strategies of a Traditional Retailer and a Direct Distributor When Consumers Hold Channel Preferences

This paper studies the price game between a traditional retailer and a direct distributor who have different channel preferences. Both of the decision makers’ objectives are to maximize their individual expected utilities. We formulate the two decision makers’ utility functions and find out their corresponding equilibrium solutions after a game process. We conclude that the traditional retailer has an advantage over the direct distributor in the market full of unconstrained competition. The traditional retailer’s equilibrium price increases with the reduction of its consumer’s purchasing-intention sensitiveness to the distance of consumption. Based on the result, we find that the game is not able to arrive at the Nash equilibrium solution in certain situations. Moreover, the transportation cost and bargain cost strongly influence the equilibrium solutions of the price game if the market constraints become tighter. Along with the increasing tightness of the market constraints, it appears that both the traditional retailer and the direct distributor dynamically adjust their solutions according to the same strategy. Finally, we draw a conclusion and suggest the potential directions for future research.