Impact of price adjustment speed on the stability of Bertrand–Nash equilibrium and profit of the retailers

Abstract

Purpose

The purpose of this paper is to investigate the impact of price adjustment speed on the stability of Bertrand–Nash equilibrium in the context of a dual-channel supply chain competition.

Design/methodology/approach

The paper considers a dual-channel supply chain comprising a manufacturer, a traditional retailer and an online retailer. A two-dimensional discrete dynamical system is used to examine the Bertrand competition between the retailers. The retailers are assumed to follow bounded rational expectations. Local stability of Bertrand–Nash equilibrium is investigated with respect to the price adjustment speed.

Findings

As the price adjustment speed increases, the stability of Bertrand–Nash equilibrium is lost, leading to complex chaotic dynamics. The results showed that chaotic dynamics deteriorates the profit of the retailers. The authors also found that the chaos can be controlled using an adaptive adjustment mechanism and the retailers enjoy higher profit when the chaos is controlled.

Practical implications

This study helps retail managers to choose an appropriate price adjustment speed to maximize profit.

Originality/value

The heterogeneity of the retailers is not considered in the studies involving dynamics of retailer competition. This paper contributes to the literature by considering the operational difference between a traditional retailer and an online retailer, i.e. price adjustment speed. In addition, the study establishes a link between price adjustment speed and profit.

Citation

T.M., R. and Mahanty, B. (2018), "Impact of price adjustment speed on the stability of Bertrand–Nash equilibrium and profit of the retailers", Kybernetes, Vol. 47 No. 8, pp. 1494-1523. https://doi.org/10.1108/K-08-2017-0301