Coordinating ordering and pricing decisions in a two-stage distribution system with price-sensitive demand through short-term discounting

Chung-Chi Hsieh, Yu Te Liu, Wei Ming Wang

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)

Abstract

We consider a short-term discounting model in which 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 under two common types of demand, linear demand in price and constant elasticity demand in price. Our numerical study reveals that, in the presence of homogeneous retailers (namely, retailers with identical demand rates), the distributor's profit improvement due to coordination generally decreases as the number of retailers or the inventory holding cost rate increases, but increases as price elasticity increases. Although an increase in 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 that with heterogeneous retailers (namely, retailers with different demand rates), offering a discounted price under linear demand benefits the distributor when both the inventory holding cost rate and the variation in demand are either small or large. This cross effect, however, is absent under constant elasticity demand.

Original languageEnglish
Pages (from-to)142-151
Number of pages10
JournalEuropean Journal of Operational Research
Volume207
Issue number1
DOIs
Publication statusPublished - 2010 Nov 16

All Science Journal Classification (ASJC) codes

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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