Essays on Selling to Strategic Customers with a Supply Chain Perspective

We consider a decentralized supply chain consisting of a retailer and a supplier that serves forward-looking consumers in two periods. In each period, the supplier and the retailer dynamically set the wholesale and retail price to maximize their own profits. The consumers are heterogeneous in their evaluations of the product and are strategic in deciding whether and when to buy the product, choosing the option that maximizes their utility, including waiting for a price mark-down. We derive the equilibrium and study the value of price and quantity commitments from both the retailer's and the supplier's perspective. We consider not only unilateral commitments but also simultaneous and concurrent commitments. We find that, while a centralized system always benefits from making price and quantity commitments, this is not true for a firm in a decentralized supply chain due to how the other firm responds to these commitments. We show that the retailer suffers from making a price or quantity commitment and that, similarly, the supplier does not benefit from making a price commitment. In these cases, commitments can harm not only the firm itself but also profitability of the other firm in the supply chain, thereby disadvantaging the entire supply chain. This happens because such commitments aggravate double-marginalization inefficiency in the supply chain. We strengthen our results with extensive robustness checks by altering key modeling assumptions. We find that majority of our results remain the same. In addition, we show eliminating this inefficiency through a coordinating contract (e.g., a two part tariff or quantity discount) makes commitments beneficial. Furthermore, we extend our model by introducing demand uncertainty to explore the effects of uncertainty to firm profits, prices and quantities in a decentralized setting when selling to forward looking customers. We find that demand uncertainty intensifies the strategic behavior. In addition we find that supplier's loss due the demand uncertainty is bigger than that of retailer's and retailer's loss due to customers' strategic behavior is bigger than that of supplier's. Moreover we show that while in a centralized system demand uncertainty decreases the strategic loss it has a bi-model effect on the decentralized supply chain's loss such that when volatility in demand is smaller than a threshold value it increases the loss beyond that level it decreases it.