The role of retailer’s performance in optimal wholesale price discount policies

Abstract

The main goal of this paper is to model the effects of wholesale price control on manufacturer's profit, taking explicitly into account the retailer's sales motivation and performance. We consider a stylized distribution channel where a manufacturer sells a single kind of good to a single retailer. Wholesale price discounts are assumed to increase the retailer's motivation thus improving sales. We study the manufacturer's profit maximization problem as an optimal control model where the manufacturer's control is the discount on wholesale price and retailer's motivation is one of the state variables. In particular in the paper we prove that an increasing discount policy is optimal for the manufacturer when the retailer is not efficient while efficient retailers may require to decrease the trade discounts at the end of the selling period. Computational experiments point out how the discount on wholesale price passed by the retailer to the market (passthrough) influences the optimal profit of the manufacturer.

Achieving Supply Chain Coordination Through Lot Size Based Discount

“…Hojung and Benton [29] Proposed a model to allow supplier to offer discounts that capitalize on original economic lot sizes and share the buyer's risk of temporary overstocking under uncertain demand. Bykadorov et al [30] Modeled the effect of wholesale price discount on manufacturer's profit and the role of performance of the retailer in deciding optimal policies. Xie et al [31] Analyzed a single manufacturer, multi-retailer chain and studied the effectiveness of price discount in the presence of early order commitment (EOC), and showed that although the EOC based wholesale pricediscount scheme cannot guarantee to reach an optimal solution, it still helps to reduce supply chain cost in comparison to no EOC policy.…”

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