We identify the conditions under which a myopic pricing behavior could be a profit enhancing tool in the distribution channel. A channel member behaves myopic if he ignores the evolution of the retail prices when actual and past retail prices affect consumers' purchasing decisions. A differential game is formulated where channel members control transfer and retail prices. We start by examining a bilateral monopoly, and then introduce competition at the manufacturing level. The competing manufacturers play à la Nash and can behave both myopic, both farsighted, or only one myopic. The effects of myopia and competition are examined on decisions and outcomes and on total channel profit. Our results state that, for bilateral monopolies, myopia enhances total channel profit when the effect of the reference price is low. Under competition at the manufacturing level, the previous condition holds only when products are very differentiated.
Published September 2007 , 32 pages