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

Abstract

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.