Pricing and Service Decision in a Dual-Channel System Considering Zone of Service Tolerance

In the dual-channel retail industry, excessive enthusiasm in offline retailers’ services often extends beyond the customer’s “interpersonal distance zone”, leading to psychological discomfort for customers and a subsequent loss of demand. This situation can trap retailers in a dilemma known as the “service trap”. To address this issue, we introduce the concept of the zone of service tolerance, which encompasses desired and adequate levels of service, into a dual-channel supply chain consisting of an online channel manufacturer and an offline retailer. We incorporate the zone of service tolerance into the demand function of the offline retailer and establish its profit function, a dynamic game theory to demonstrate the existence of a linkage mechanism between the optimal selling price and service level, providing the conditions for such a mechanism to exist. Additionally, we establish conditions for offline retailers to avoid over-servicing or under-servicing and consider the impacts of these conditions, and we reveal the stability conditions of the offline retailers’ service decisions. Our findings indicate that both over- and under-servicing can lead to customer churn. For newly launched products, offline retailers risk losing customers by adopting a sales strategy focused on high profits and moderate sales (under-servicing). Similarly, for products nearing removal from the shelves, they risk losing customers by adopting a sales strategy focused on low profits and high sales (over-servicing). Furthermore, under certain ranges for the service sensitivity factor, desired service, or adequate service, the optimal service provided by offline retailers remains robust regardless of the manufacturer’s optimal selling price. This greatly simplifies the offline retailer’s decision-making process regarding service levels, as they can directly focus on providing the desired service without factoring in the manufacturer’s pricing strategy.