Coordinating ordering and pricing decisions in a two-stage distribution system

We consider a particular model of short-term discounting that the distributor offers a discounted price for the retailers' orders placed at the beginning of its replenishment cycle, in a non-cooperative distribution system with one distributor and multiple retailers, each facing price-sensitive demand. We examine the value of the price discount strategy as a mechanism for the distributor to coordinate the retailers' ordering and pricing decisions. Our analysis reveals that, in the presence of homogeneous retailers, the distributor's profit percentage increase due to coordination generally is decreasing in the number of retailers and in the inventory holding cost rate. Although an increase of the inventory holding cost rate has a negative effect on the distributor's profit, it may have a positive effect on the retailers' profits. We further find in the presence of heterogeneous retailers that offering a discounted price benefits the distributor when both the inventory holding cost rate and the variation of demand are small or large.