Document Type

Working Paper

Abstract

We consider a retailer that offers multiple variants of two brands, all of which are substitutable,within a single product category. Due to supply disruptions, the retailer may not be able to alwaysoffer either or both brands. To mitigate potential loss in demand due to unavailability of one brand,the retailer may choose the product variety strategically and/or adjust the price of the availablebrand. The goal of this paper is to compare the relative impact of these two levers of demand management in the face of supply disruptions. To that end, we develop and analyze a model of a retailerbuying from two brands (suppliers) subject to random supply disruptions. The retailer’s customerdemand depends on price and product variety, and their impact on customer choice is capturedthrough the nested logit model. The model also takes into account fixed design and operationalcosts associated with product variety. Our analysis reveals that strategic choice of product varietyyields most of the benefit; price is a largely ineffective lever. We also show that when the supply ofone brand is disrupted, the optimal price for the other brand is lower than when both brands areavailable, provided the outside option is equally or less affected by the disruption. However, even ifthe outside option is affected more, this result may not necessarily reverse. Finally, even though responsive pricing does not improve the profit substantially, it may reduce safety stock requirements.

Publication Date

1-1-2024

Publisher

Indian Institute of Management Bangalore

Relation

IIMB Working Paper-703

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