Managing a supply chain under the impact of customer reviews: A two-period game analysis

Xuerong WANG, Mingming LENG*, Jingpu SONG, Chunlin LUO, Sunyuen HUI

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

Abstract

We investigate a two-period problem for a supply chain involving a manufacturer and a retailer, who serve early and late customers in the first and second periods, respectively. In each period, customers make their purchase decisions and also provide their review ratings. The manufacturer determines his quality and wholesale price, and the retailer then decides on her retail price. We perform a game-theoretic analysis and find Stackelberg equilibrium for the supply chain in each period. When early customers overrate the actual quality in their ratings, the sales in the second period are higher than those when the average review rating reflects the actual quality, and the quality levels as well as the wholesale and retail prices in the two periods are no smaller than those when the actual quality is truly rated. Moreover, in both periods, the quality overstatement increases the retailer’s expected profits in the two periods but may reduce the manufacturer’s expected profits. We also show that the supply chain can achieve a higher profit if customers gain a greater utility per quality level. A larger value of customers’ unit quality-deviation-based rating can raise the quality level as well as the expected sales and the two firms’ expected profits in the second period. The supply chain can obtain a higher profit in the first period if the variance of early customers’ quality expectations is larger, and it can achieve a higher profit in the second period if the variance of later customers’ quality perceptions is smaller.
Original languageEnglish
Pages (from-to)454-468
Number of pages15
JournalEuropean Journal of Operational Research
Volume277
Issue number2
Early online date21 Feb 2019
DOIs
Publication statusPublished - 1 Sep 2019

Fingerprint

Supply Chain
Supply chains
Profitability
Customers
Game
Profit
Sales
Review
Supply chain
Game analysis
Stackelberg Equilibrium
Deviation
Rating
Unit

Bibliographical note

The first author (Xuerong Wang) was supported by the National Natural Science Foundation of China under Grant numbers 71471082 and 71862014. The second author (Mingming Leng) was supported by the General Research Fund (GRF) of the Hong Kong Research Grants Council under Research Project no. LU13500015.

Keywords

  • Customer reviews
  • Game theory
  • Pricing
  • Quality
  • Supply chain management

Cite this

WANG, Xuerong ; LENG, Mingming ; SONG, Jingpu ; LUO, Chunlin ; HUI, Sunyuen. / Managing a supply chain under the impact of customer reviews: A two-period game analysis. In: European Journal of Operational Research. 2019 ; Vol. 277, No. 2. pp. 454-468.
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Managing a supply chain under the impact of customer reviews: A two-period game analysis. / WANG, Xuerong; LENG, Mingming; SONG, Jingpu; LUO, Chunlin; HUI, Sunyuen.

In: European Journal of Operational Research, Vol. 277, No. 2, 01.09.2019, p. 454-468.

Research output: Journal PublicationsJournal Article (refereed)

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AU - LUO, Chunlin

AU - HUI, Sunyuen

N1 - The first author (Xuerong Wang) was supported by the National Natural Science Foundation of China under Grant numbers 71471082 and 71862014. The second author (Mingming Leng) was supported by the General Research Fund (GRF) of the Hong Kong Research Grants Council under Research Project no. LU13500015.

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N2 - We investigate a two-period problem for a supply chain involving a manufacturer and a retailer, who serve early and late customers in the first and second periods, respectively. In each period, customers make their purchase decisions and also provide their review ratings. The manufacturer determines his quality and wholesale price, and the retailer then decides on her retail price. We perform a game-theoretic analysis and find Stackelberg equilibrium for the supply chain in each period. When early customers overrate the actual quality in their ratings, the sales in the second period are higher than those when the average review rating reflects the actual quality, and the quality levels as well as the wholesale and retail prices in the two periods are no smaller than those when the actual quality is truly rated. Moreover, in both periods, the quality overstatement increases the retailer’s expected profits in the two periods but may reduce the manufacturer’s expected profits. We also show that the supply chain can achieve a higher profit if customers gain a greater utility per quality level. A larger value of customers’ unit quality-deviation-based rating can raise the quality level as well as the expected sales and the two firms’ expected profits in the second period. The supply chain can obtain a higher profit in the first period if the variance of early customers’ quality expectations is larger, and it can achieve a higher profit in the second period if the variance of later customers’ quality perceptions is smaller.

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