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Life-Cycle Channel Coordination Issues in Launching an Innovative Durable Product

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Abstract

We analyze the dynamic strategic interactions between a manufacturer and a retailer in a decentralized distribution channel used to launch an innovative durable product (IDP). The underlying retail demand for the IDP is influenced by word-of-mouth from past adopters and follows a Bass-type diffusion process. The word-of-mouth influence creates a trade-off between immediate and future sales and profits, resulting in a multi-period dynamic supply chain coordination problem. Our analysis shows that while in some environments, the manufacturer is better off with a far-sighted retailer, there are also environments in which the manufacturer is better off with a myopic retailer. We characterize equilibrium dynamic pricing strategies and the resulting sales and profit trajectories. We demonstrate that revenue-sharing contracts can coordinate the IDP's supply chain with both far-sighted and myopic retailers throughout the entire planning horizon and arbitrarily allocate the channel profit.

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