In this study, we investigate two important questions related to dynamic pricing in
distribution channels: (i) Are coordinated pricing decisions efficient in a context where
prices have carry-over effects on demand? (ii) Should fi rms practice a skimming or a
penetration strategy if they choose to coordinate or to decentralize their activities? To
answer these questions, we consider a differential game that takes place in a bilateral
monopoly where the past retail prices paid by consumers contribute to the building of
a reference price. The latter is used by consumers as a benchmark to evaluate the value
of the product, and by fi rms to decide whether to adopt a skimming or a penetration
strategy.
We then compute and compare strategies, total channel profi ts and individual profits
under vertical integration and decentralization at steady state and along the optimal
time-paths. One of our main fi ndings states that, for some values of the initial reference
price, there is a time interval where channel decentralization performs better than
coordination. During this transition period, at least one of the channel members could
be tempted to end his cooperation, especially if he is not farsighted and if there are no
binding agreements with the other channel partners.
