Supply chain decisions with reference quality effect under the O2O environment

The reference quality effect is an important factor that influences consumer purchasing behavior. To investigate how firms should incorporate the reference quality effect under different business models, we focus on a supply chain consisting of a supplier and a retailer where the retailer can be an offline store, a pure online store or a combination of offline and online stores within an offline to online model. We formulate the reference quality effect with a modified Nerlove-Arrow model and use two different sales functions to reflect the fact that the reference quality effect will affect consumers in various ways when the business model varies. Utilizing differential game theory, the equilibrium decisions of the channel members are derived, and the analysis illustrates how the firms should adjust their decisions when the retailers use different retail patterns. The basic model does not allow product returns, but then this assumption is relaxed. Comparison between the two cases shows under what conditions consumers will benefit from the retailer’s allowing product returns.