Research on Advertising and Pricing in E-Supply Chain Under Different Dominant Modes

Yuyan WANG, Zhaoqing YU

Journal of Systems Science and Information ›› 2018, Vol. 6 ›› Issue (1) : 58-68.

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Journal of Systems Science and Information ›› 2018, Vol. 6 ›› Issue (1) : 58-68. DOI: 10.21078/JSSI-2018-058-11
 

Research on Advertising and Pricing in E-Supply Chain Under Different Dominant Modes

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Abstract

The E-supply chain is formed gradually along with the development of network, which is getting more attention among enterprises with unique advantages. Three E-supply chain operation modes are constructed in this paper, then the optimal pricing and advertising strategies under those modes are studied and compared, which are demonstrated with numerical examples. The results of comparison and analysis show that: Selling price, network platform service level, advertising investment and the profits of manufacturer, network platform and E-supply chain all increase with advertising effectiveness of stimulating demand growth. Under centralized decision-making mode, service level is highest, advertising investment is largest and the profit of E-supply chain is highest as well. When manufacturer leads decentralized decision-making mode, not only network service level, advertising investment and the profit of manufacturer can gain better results, but also profit of network platform can be higher while the advertisement effect of increasing demand is big enough. Additionally, it is confirmed that centralized decision-making is better than decentralized decision-making for system operation. Besides, decentralized decision-making mode led by manufacturer is superior to it led by network platform on the condition that advertisement effect is obvious.

Key words

E-supply chain / dominant mode / advertising strategy

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Yuyan WANG , Zhaoqing YU. Research on Advertising and Pricing in E-Supply Chain Under Different Dominant Modes. Journal of Systems Science and Information, 2018, 6(1): 58-68 https://doi.org/10.21078/JSSI-2018-058-11

1 Introduction

The promotion of "Internet +" strategy makes it more low-cost and faster for producers to communicate with marketing. As more enterprises have begun to sell directly to consumers over the Internet, the E-supply chain composed of Internet and supply chain is formed and gets rapid development, such as JD.COM, TMALL.COM. It has been integrated into people's life, becoming an important way for enterprise to communicate with consumers, and successfully developing into a hot topic to which academic circles pay attention gradually.
A considerable number of articles have been written on E-supply chain in recent years. Chiang, et al.[1] applied a game analysis on traditional channel and E-channel, and found that E-channel decreases wholesale price and coordination thereby can be realized. Thomas and Alt[2] presented a supply chain management model of E-procurement system (EPS) and indirect product. Sherer[3] elaborated on the notion of value network advocacy in supply chain management and indicates that many management information systems need to be more customer-focused and pay more attention to information flow. Iyer, et al.[4] adopted "fit" concept and analysed the integration and performance of E-supply chain, which would decrease when product turbulence and demand unpredictability jointly increased. As for the practical application of E-supply chain, according to Valverde and Saade[5], the fact that E-supply chain management has advantages in improving efficiency and increasing profits has been demonstrated by an illustration: The electronics manufacturing industry in North America. Lu and Liu[6] mainly compared single-channel and dual-channel systems in a two-echelon supply chain, the study aimed at helping manufacturers decide whether or not to open an E-channel. Araneda, et al.[7] addressed the coordination of capacities of two manufacturers in a B2B supply chain, and a contract that leads the two manufacturers to win-win capacity decisions was proposed and analyzed as well. Siddiqui and Raza[8] investigated the status quo of E-supply chain research with a five-dimensional framework, finding that innovation, adoption and barriers receive significant attention in the earlier period, while in the latter period, the focus shifts to issues involving integration and collaboration. Kiselicki, et al.[9] learned that several disadvantages characterizing the traditional model could potentially be solved through the E-supply chain model. All of these studies, however, do not address advertising problem——A key problem in E-supply chain. Due to lack of specialized entity sales organizations and sales network in E-supply chain, advertising becomes a main way for E-supply chain enterprises to expand product influence, and directly affects the enterprises' survival and development.
Previous advertising research mainly focus on traditional supply chain. Considering that demand is affected by advertising and price, Xie and Neyret[10] built a traditional supply chain consisting of a manufacturer and a retailer and identified optimal advertising and pricing for supply chain enterprises. Much research on cooperative advertising are carried out especially in recent years. Ahmadi and Hoseinpour[11] discussed equilibrium solution of centralized advertising in a two-stage supply chain under cooperative game and non-cooperative game. Aust and Buscher[12] conducted a literature review to compare cooperative advertising strategy in traditional supply chain. Zhao, et al.[13] analysed cooperative advertising decisions in a two-tier supply chain, and explicitly showed how demand price react to advertising decision. Considering the influence of the network marketing, Yan[14] studied enterprises' centralized advertising and pricing strategy, the influence of advertising strategy on firm performance is examined in this paper as well. Then Yan, et al.[15] studied manufacturer's centralized advertising and information sharing on the condition that demand is uncertain.
The above research achievements establish basis for us to study advertising in E-supply chain. This paper is going to research on advertising and pricing in E-supply chain under different dominant modes, which is of great significance to promoting and enhancing the development of E-supply chain.

2 The Instructions of Model

Assume a short-life-cycle product E-supply chain consisting of one manufacturer and one network platform whose overall structure is shown in Figure 1. In E-supply chain, without particular retailer, manufacturer is not only responsible for production, but also releases sales information with the help of network platform for product sales. While using the sales service from network, manufacturer also pays commission to network platform as compensation. Meanwhile, manufacturer and network platform would like to adopt advertising strategy to simulate sales.
Figure 1 Structure of the E-supply chain

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Model assumptions and symbols are shown as follows:
p: unit selling price;
c: unit production cost by manufacturer;
q: consumer demand;
ρ: unit commission by network platform, also means fees paid to network platform by manufacturer for selling every unit product;
s: network platform service level. Assume that demand increase with service level;
v: advertising investment;
q is demand function quoted from [16], that is,
q=αβp+γs+δv.
(1)
The parameters α,β,γ,δ are positive, α denotes market saturation. The parameters β, γ and δ denote price elastic coefficient, service level elastic coefficient and advertising investment elastic coefficient, respectively. They manifest the degree of selling price, service level and advertising investment in stimulating demand.
In order to ensure that these problems make sense, parameters in assumption models have to meet,
αβc>0,4βδ2γ2>0.
The corresponding dominant modes vary with strength of manufacturer and network platform in E-supply chain. If manufacturer's strength is greater than the strength of network platform, manufacturer can seize chain's initiative and consequently become the dominant enterprise. On the contrary, when the strength of network platform is greater than that of manufacturer, network platform can dominate the chain. Therefore, there are two dominant modes in E-supply chain based on the difference of enterprise strength, namely, decentralized decision-making mode of manufacturer dominating and decentralized decision-making mode of network platform dominating. Besides, because of funds limitation the weaker subordinate enterprise is not likely to adopt advertising strategy, the powerful dominant enterprise generally bears advertising investment in E-supply chain. In the following sections, advertising and pricing in E-supply chain under different dominant modes are analyzed based on advertising investment subject.

3 Decentralized Decision-Making Mode

As independent economic agents, manufacturer and network platform both maximize their own profits as the goal of decision-making under decentralized decision-making mode. According to different dominant modes of E-supply chain, the corresponding dominant modes of decentralized decision-making are discussed in the following section.

3.1 Decentralized Decision-Making Mode of Manufacturer Dominating

If manufacturer dominates system, manufacturer's strength is stronger. In order to further expand sales market, manufacturer would employ advertising strategy and adequately advertise product. In this case, manufacturer's profit function is
πm=(pρc)qv.
(2)
For network platform, similarly, the profit function can be expressed as follows:
πe=ρqs.
(3)
Under this decision-making mode, the relationship between the manufacturer and network platform is modeled as Stackelberg model with manufacturer as the leader and network platform as the follower. The sequential decision order can be described as follow: Manufacturer, as the leader, first declares selling price and advertising expenditure that he is willing to invest on the basis of market prediction. Network platform, as the follower, then sets its own service level. The equilibrium solutions are gained through backward induction.
Conclusion 1 Under decentralized decision-making mode of manufacturer dominating, we can obtain the optimal results as shown below:
The optimal selling price is
p1=2α+2βc+2βρ+ργ2ρδ2cδ24βδ2.
The optimal advertising investment is
v1=δ2(2α+ργ22βc2βρ)24(4βδ2)2.
The optimal network platform service level is
s1=ρ2γ24.
The optimal profits of manufacturer, network platform and the whole E-supply chain can be expressed respectively:
πm1=(2α2βc2βρ+ργ2)24(4β4δ2),πe1=ρ(8αβ8β2c8β2ρ+ρδ2γ2)4(4βδ2),π1=4α2+4β2c24β2ρ2+ρ2γ44βρ2γ28αβc+4αργ2+ρ2δ2γ24βcργ24(4βδ2).

3.2 Decentralized Decision-Making Mode of Network Platform Dominating

If network platform dominates system, network platform's strength is stronger. So network platform would employ advertising strategy and spend money on advertising. Thus, the manufacturer's profit function is
πm=(pρc)q.
(4)
Then the profit function of network platform is
πe=ρqsv.
(5)
In this part, we model the relationship between the manufacturer and network platform as Stackelberg model in the same way as in Part 3.1, while network platform being the leader and manufacturer being the follower. The sequential decision order can be described as follow: Firstly, network platform determines service level and advertising investment, then manufacturer presents selling price. We use backward induction to get the following equilibrium solutions.
Conclusion 2 Under decentralized decision-making mode of network platform dominating, we can obtain the optimal results as shown below:
The optimal selling price is
p2=4α+4β(c+ρ)+ρ(δ2+γ2)8β.
The optimal advertising investment is
v2=ρ2δ216.
The optimal network platform service level is
s2=ρ2γ216.
The optimal profits of manufacturer, network platform and the whole E-supply chain can be expressed respectively:
πm2=[4α4β(c+ρ)+ρ(δ2+γ2)]264β,πe2=ρ[8α8β(c+ρ)+ρ(δ2+γ2)]16,π2=πm2+πe2=[4α4β(c+ρ)+ρ(δ2+γ2)]2+4βρ[8α8β(c+ρ)+ρ(δ2+γ2)]64β.

4 Centralized Decision-Making Mode

Centralized decision-making mode is an ideal state for E-supply chain, under which manufacturer and network platform cooperate with advertising strategy and share advertising costs together. That is to say, both manufacturer and network platform maximize E-supply chain's profit when making decisions, which also indicates that the dominant positions are consistent. Hence, E-supply chain's profit function is
π=(pc)qvs.
(6)
Only when manufacturer and network platform determine selling price, advertising investment, service level together, E-supply chain can achieve profit maximization. The objective function can be rewritten as
maxp,v,sπ=(pc)qvs.
(7)
By taking π/p=0,π/s=0,π/v=0, we obtain the optimal results.
Conclusion 3 Under centralized decision-making mode, we can obtain the optimal results as shown below:
The optimal selling price is
p3=2α+2βc(δ2+γ2)c4βδ2γ2.
The optimal advertising investment is
v3=δ2(αβc)2(4βδ2γ2)2.
The optimal network platform service level is
s3=γ2(αβc)2(4βδ2γ2)2.
The profit of E-supply chain is
π3=(αβc)24βδ2γ2.

5 Comparisons

According to comparison with above conclusions, further relationship of optimal decision variables are analyzed respectively.
Conclusion 4 The selling price have p1>p2:
When δ<δ1, p1>p3; when δ>δ1, p1<p3, where δ1=2βγ2(2α2βc2βρ+ργ2)ρ(4βδ2).
Proof See in Appendix 1.
From Conclusion 4, we can know: It is obvious that under decentralized decision-making mode, when manufacturer dominates E-supply chain, with absolute control over system, the selling price is higher compared to network platform dominating E-supply chain. Also, under centralized decision-making mode, selling price is higher than it under decentralized decision-making mode in the case of δ>δ1. This is because manufacturer and network platform bear advertising expenditure together under centralized decision-making mode, increased cost due to increased advertising investment makes selling price rise to guarantee the system's profit. However, if δ<δ1, selling price in centralized decision-making mode is lower than it in decentralized decision-making mode.
Conclusion 5 Advertising investment have: v3>v1>v2.
Proof See in Appendix 2.
Conclusion 5 indicates that advertising investment is highest in centralized decision-making mode thanks to co-op advertising. Manufacturer invests more in advertisement than network platform in decentralized decision-making mode, which reveals that manufacturer is more focused on advertising to increase demand. Thus, if manufacturer's strength is strong enough, manufacturer is likely to put more money in advertising compared with network platform.
Conclusion 6 Network platform service level have s2=14s1,s3>s1>s2.
Proof See in Appendix 3.
As we can see from Conclusion 6, also combining with Conclusions 1 to 3, network platform service level is merely related to commission and the elasticity coefficient of service level in stimulating demand in decentralized decision-making mode. Under the circumstance that manufacturer and network platform make decision together, highest service level is achieved. And obviously, service level is higher when manufacturer dominates E-supply chain, especially compared with service level when network platform occupies dominant position. One interpretation may be that if network platform dominates system, relying on its own dominance, it would lower service level to reduce costs and guarantee profit.
Conclusion 7 1) Manufacturer's profit have πm1>πm2; 2) E-supply chain's profit have π3>π1>π2.
Proof See in Appendix 4.
Conclusion 7 illustrates the profit functions. When manufacturer dominates E-supply chain in decentralized decision-making mode, manufacturer is most profitable. And E-supply chain achieve highest optimal profit in centralized decision-making mode. Therefore, we could say that it is when enterprises of E-supply chain occupy equal dominant position and make collaborative decisions that the system can achieve best operation performance.

6 Numerical Analysis

While our conclusions can be derived analytically, the analytical denotes are too abstract to provide practical significance. So now we use numerical examples to demonstrate the effect of change of δ.
Assume α=100,β=15,c=3,m=2,γ=4, δ is independent variable and δ[1,5]. We draw all decision variable curves with the change of δ in Figures 2~7.
Figure 2 Selling price curves

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Figure 3 Service level curves

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Figure 4 Advertising investment curves

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Figure 5 Manufacturer' s profit curves

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Figure 6 Network platform's profit curves

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Figure 7 E-supply chain's profit curves

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Figures show that:
1) Selling price, network platform service level, advertising investment and the profits of manufacturer, network platform and E-supply chain are positively related to δ, advertising investment elastic coefficient in stimulating demand. In other words, they all increase with advertising effectiveness of boosting demand.
2) The highest service level, the largest advertising investment, the maximal E-supply chain profit are provided under centralized decision-making mode. And it is quite clear that selling price relates to δ. When δ reaches a certain degree (δ>B in Figure 2), the highest selling price is observed in centralized mode, which confirms that high advertising effectiveness of boosting demand is beneficial to E-supply chain operation.
3) Decentralized decision-making mode of manufacturer dominating provides higher service level, more advertising investment and higher manufacturer profit in comparison with decentralized decision-making mode of network platform dominating, which also implies that who owns control over E-supply chain can increase own profit. And similarly, profit of network platform is closely related to δ. Only when δ reaches a certain degree (δ>D in Figure 6) can the profit of network platform be higher. The results further reflects that if advertising effectiveness is large, the chances are much more that decentralized decision-making mode of manufacturer dominating are explicitly favored by manufacturer and network platform.
Thus it can be seen that centralized decision-making is always better than decentralized decision-making for system operation. However, centralized decision-making is an ideal state, which requires coordination mechanism to be realized. When the system lacks effective coordination mechanism, and if advertisement effect is big, decentralized decision-making mode of manufacturer dominating is an ideal choice for E-supply chain enterprises.

7 Concluding remarks

An E-supply chain model composed of one manufacturer and one network platform is constructed in this paper, and three E-supply chain operation modes are analyzed, including "decentralized decision-making mode of manufacturer dominating", "decentralized decision-making mode of network platform dominating", "centralized decision-making mode". Selling price, advertising investment and service level are calculated for all cases, respectively. Then comparisons are made and numerical examples are analyzed to verify conclusions. The results show that:
1) Selling price, network platform service level, advertising investment and the profits of manufacturer, network platform and E-supply chain all increase with advertising effectiveness of stimulating demand growth.
2) Under centralized decision-making mode, service level is highest, advertising investment is largest and the profit of E-supply chain is highest as well.
3) Under decentralized decision-making mode, when manufacturer leading E-supply chain, higher service level, more advertising investment and higher manufacturer profit are gained in comparison with decentralized decision mode of network platform dominating. But if advertising effectiveness reaches a certain degree, network platform's profit can be higher in case of platform dominating E-supply chain.
4) Centralized decision-making is absolutely better than decentralized decision-making for system operation if coordination mechanism is achieved. But if system lacks effective coordination mechanism and when the advertisement effect is big, decentralized decision-making mode led by manufacturer is an practical choice for E-supply chain enterprises.
Actually, the article only studies decision-making problem in E-supply chain under different dominant modes. As a result, the coordination of different dominant modes, especially coordination between centralized decision-making and decentralized decision-making will be future research direction.

Appendix

Appendix 1 Proof of Conclusion 4
Comparing the optimal selling price of Parts 3.1 and 3.2, we can get
p1p2=4δ2(αβc)+ρ[4βγ28βδ2+δ2γ2+δ4]8β(4βδ2),
which can be rewritten as
p1p2=4δ2(αβc2βρ)+ρ[γ2(4βδ2γ2)+(γ2+δ2)2]8β(4βδ2).
By the known, αβc>0, α denotes market saturation, big positive number. So it's easy to prove p1p2>0.
Then compare p1 and p3,
p1p3=2γ2(αβc)+ρ[8β2γ4+δ4+2β(γ23δ2)](4βδ2)(4βδ2γ2)=γ2(2α2βc2βρ+ργ2)+ρ(4βδ2)(2βδ2)(4βδ2)(4βδ2γ2).
By solving p1=p3, we can get critical value
δ1=2βγ2(2α2βc2βρ+ργ2)ρ(4βδ2),
which is point B in Figure 2.
Therefore, by means of solving process of δ1, we can compare p2 and p3 to get the other critical value δ2.
p3p2=(4α4βc)(δ2+γ2)ρ(4βδ2γ2)(4β+δ2+γ2)8β(4βδ2γ2).
Let p3=p2, we have
δ2=4βγ2(4α4βc)(δ2+γ2)ρ(4β+δ2+γ2).
Appendix 2 Proof of Conclusion 5
v2v1=δ2[ρ(4βδ2)+2(2α+ργ22βc2βρ)][ρ(4βδ2)2(2α+ργ22βc2βρ)]16(4βδ2)2.
By the known, αβc>0, α denotes market saturation, big positive number, then
ρ(4βδ2)2(2α+ργ22βc2βρ)<0.
As a result, v2v1<0, that is, v1>v2,
v3v1=δ2[2(4βδ2)(αβc)+(4βδ2γ2)(2α+ργ22βc2βρ)]4(4βδ2)2(4βδ2γ2)2[2(4βδ2)(αβc)(4βδ2γ2)(2α+ργ22βc2βρ)].
Just like the proof process of v1>v2, it is obvious to get the conclusion of v3>v1.
Appendix 3 Proof of Conclusion 6
s2=ρ2γ216=14s1,s1s3=γ2[ρ(4βδ2γ2)+2(αβc)][ρ(4βδ2γ2)2(αβc)]4(4βδ2γ2)2.
By the known, it's easy to prove s1s3<0, namely s3>s1.
Appendix 4 Proof of Conclusion 7
πm1πm2=4βρ(8α8βc8βρ+3ργ2+ρδ2)(γ2δ2)+(4α4βc4βρ+ργ2+ρδ2)2δ264β(4β4δ2)>0,πe1πe2=ρ(8αδ2+ρδ4+5ρδ2γ28βcδ212βρδ24βργ2)16(4βδ2)=ρ[δ2(8α8βc8βρ+ρδ2+ργ2)+4ρ(δ2γ2βδ2βγ2)]16(4βδ2).
If advertising investment elastic coefficient is small enough, πe1<πe2 will be obtained. However, as advertising investment elastic coefficient increases, the relationship between πe1 and πe2 turns out just the opposite. Considering πm1>πm2, it is easy to prove π1>π2.

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Acknowledgements

The authors gratefully acknowledge the Editor and anonymous referees for their insightful comments and helpful suggestions that led to a marked improvement of the article.

Funding

the National Natural Science Foundation of China(71501111)
the Natural Science Foundation of Shandong Province(ZR2014JL046)
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