We study retailers’ preferences for transshipment timing in the presence of product substitution in overlapping markets where there is either pre-substitution transshipment (TS) or post-substitution transshipment (ST). By building a two-retailer game model, we find that when the retailer with excess inventory can dictate the transshipment price, there always exists a unique pair of equilibrium order quantities. We also find that the equilibrium order quantity in the post-substitution transshipment will always be larger than that in the pre-substitution transshipment in the symmetric case. But surprisingly, the expected profit of the post-substitution transshipment always dominates that of the pre-substitution transshipment, though the presubstitution transshipment has mitigated the inventory competition. We then examine the impact of the transshipment price, the switching probability, and transshipment cost to the retailers’ profit. Through extensive numerical experiments, we find that when a large proportion of customers are willing to switch and the transshipment price is low, retailers prefer pre-substitution transshipment; but when there are almost no switching customers or the transshipment price is high, retailers prefer postsubstitution transshipment. We further study an asymmetric game and find that asymmetry benefits the retailer with cost advantage but damages the other retailer. We also find that two asymmetric retailers may prefer different transshipment timings in the asymmetric case.
|Date of Award||4 Sept 2020|
|Supervisor||Weixin SHANG (Supervisor)|