Short lifetime product supply chain coordination and social benefit considering cannibalization effect and market segmentation

Abstract

Short lifetime product retailers often face the challenge of cannibalization between new and old products, which can negatively impact their profitability. They attempt to influence consumers’ choices through price differentiation, resulting in internal competition regarding products’ age and price. The pricing decisions affect market demand, sales volume, and as a result, the whole supply chain (SC) profit. This paper coordinates inventory and pricing decisions in a short lifetime product supply chain (SLPSC), considering the cannibalization effect. The investigated SLPSC includes a supplier and a retailer operating in a segmented market. Firstly, the optimal decisions of the SLPSC members are obtained under decentralized and centralized decision-making structures. Then, a new coordination contract named wholesale price and double compensation (WPDC) is designed to motivate the SC members to shift from the decentralized structure to the centralized one. The findings indicate that the coordinated model creates more economic profitability for the whole SLPSC than the decentralized one. Furthermore, the proposed WPDC contract is more beneficial for the SLPSC from a social viewpoint, as it increases consumer surplus. The results also demonstrate that when consumers are more sensitive to the product’s freshness, a price differentiation policy is more profitable than the same pricing.