Supply Chain Coordination with Dynamic Pricing Advertising and Consumer Welfare An Economic Application

Abstract

In this paper, we construct a supply chain coordination model that considers the complex relationships among dynamic pricing, advertising investment, and consumer welfare. The model focuses on a supply chain consisting of a manufacturer and a retailer, where the manufacturer produces the product and the retailer sells it. We first analyze the equilibrium under decentralized decision-making, in which the retailer is the leader and the manufacturer the follower. By building a differential game model, we derive the optimal pricing and advertising strategies under decentralization. Then, we set a centralized optimal benchmark in which the supply chain acts as an integrated decision maker. Comparing decentralized and centralized decisions, we find a double-marginalization effect under decentralization that reduces the total profit of the supply chain. To address this, we design a series of coordinating contracts—including revenue sharing, price discount, and two-part tariff contracts—among which revenue sharing can effectively coordinate the chain and maximize total profit. We further analyze the effect of advertising on consumer welfare. Using a consumer welfare measurement model, we find that advertising increases consumer surplus and thus improves consumer welfare. Numerical simulations verify the effectiveness of the model and the superiority of the coordinating contracts.