The effects of customer rebates and retailer incentives on a manufacturer's profits and sales

In some industries such as automotive, production costs are largely fixed and therefore maximizing revenue is the main objective. Manufacturers use promotions directed to the end customers and/or retailers in their distribution channels to increase sales and market share. We study a game theoretical model to examine the impact of “retailer incentive” and “customer rebate” promotions on the manufacturer's pricing and the retailer's ordering/sales decisions. The main tradeoff is that customer rebates are given to every customer, while the use of retailer incentives is controlled by the retailer. We consider several models with different demand characteristics and information asymmetry between the manufacturer and a price discriminating retailer, and we determine which promotion would benefit the manufacturer under which market conditions. When demand is deterministic, we find that retailer incentives increase the manufacturer's profits (and sales) while customer rebates do not unless they lead to market expansion. When the uncertainty in demand (“market potential”) is high, a customer rebate can be more profitable than the retailer incentive for the manufacturer. With numerical examples, we provide additional insights on the profit gains by the right choice of promotion.© 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Competing with channel partners: Supply chain conflict when retailers introduce store brands

Private‐label products are of increasing importance in many retail categories. While national‐brand products are designed by the manufacturer and sold by the retailer, the positioning of store‐brand products is under the complete control of the retailer. We consider a scenario where products differ on a performance quality dimension and we analyze how retailer–manufacturer interactions in product positioning are affected by the introduction of a private‐label product. Specifically, we consider a national‐brand manufacturer who determines the quality of its product as well the product's wholesale price charged to the retailer. Given the national‐brand quality and wholesale price, the retailer then decides the quality level of its store brand and sets the retail prices for both products. We find that a manufacturer can derive substantial benefits from considering a retailer's store‐brand introduction when determining the national brand's quality and wholesale price. If the retailer has a significant cost disadvantage in producing high‐quality products, the manufacturer does not need to adjust the quality of the national‐brand product, but he should offer a wholesale price discount to ensure its distribution through the retailer. If the retailer is competitive in providing products of high‐quality, the manufacturer should reduce this wholesale price discount and increase the national‐brand quality to mitigate competition. Interestingly, we find the retailer has incentive to announce a store‐brand introduction to induce the manufacturer's consideration of these plans in determining the national‐brand product quality and wholesale price. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Supply contracts in manufacturer‐retailer interactions with manufacturer‐quality and retailer effort‐induced demand

We consider a decentralized distribution channel where demand depends on the manufacturer‐chosen quality of the product and the selling effort chosen by the retailer. The cost of selling effort is private information for the retailer. We consider three different types of supply contracts in this article: price‐only contract where the manufacturer sets a wholesale price; fixed‐fee contract where manufacturer sells at marginal cost but charges a fixed (transfer) fee; and, general franchise contract where manufacturer sets a wholesale price and charges a fixed fee as well. The fixed‐fee and general franchise contracts are referred to as two‐part tariff contracts. For each contract type, we study different contract forms including individual, menu, and pooling contracts. In the analysis of the different types and forms of contracts, we show that the price only contract is dominated by the general franchise menu contract. However, the manufacturer may prefer to offer the fixed‐fee individual contract as compared to the general franchise contract when the retailer's reservation utility and degree of information asymmetry in costs are high. © 2008 Wiley Periodicals, Inc. Naval Research Logistics, 2008     

The effect of a temporary product distribution channel on supply chain performance

We analyze a supply chain of a manufacturer and two retailers, a permanent retailer who always stocks the manufacturer's product and an intermittent deal‐of‐the day retailer who sells the manufacturer's product online for a short time. We find that without a deal‐of‐the‐day (DOTD) retailer, it is suboptimal for the manufacturer to offer a quantity discount while it is optimal for the retailer to offer periodic price discounts to consumers. With the addition of a DOTD retailer, it is likely to be optimal for the manufacturer to offer a quantity discount. We show that even without market expansion, i.e., no exclusive DOTD retailer consumers, opening the intermittent channel can leave the permanent retailer no worse‐off while increasing the manufacturer's profit. We identify the regular and discounted wholesale prices and the threshold quantity at which the manufacturer should give the discount. We also identify the optimal retail prices. We find that opening the intermittent channel increases the profit of the manufacturer, is likely to decrease the average retail price and to increase sales, and may increase the permanent retailer's profit. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 505–528, 2016     

Resale price maintenance contracts with retailer sales effort: Effect of flexibility and competition

In Resale Price Maintenance (RPM) contracts, the manufacturer specifies the resale price that retailers must charge to consumers. We study the role of using a RPM contract in a market where demand is influenced by retailer sales effort. First, it is well known that RPM alone does not provide incentive for the retailer to use adequate sales effort and some form of quantity fixing may be needed to achieve channel coordination. However, when the market potential of the product is uncertain, RPM with quantity fixing is a rigid contract form. We propose and study a variety of RPM contracts with quantity fixing that offer different forms of flexibility including pricing flexibility and quantity flexibility. Second, we address a long‐time debate in both academia and practice on whether RPM is anti‐competitive in a market when two retailers compete on both price and sales effort. We show that depending on the relative intensity of price competition and sales effort competition, RPM may lead to higher or lower retail prices compared to a two‐part tariff contract, which specifies a wholesale price and a fixed fee. Further, the impact of RPM on price competition and sales effort competition is always opposite to each other. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006     

On the effectiveness of returns policies in the price‐dependent newsvendor model

We study in this paper the price‐dependent (PD) newsvendor model in which a manufacturer sells a product to an independent retailer facing uncertain demand and the retail price is endogenously determined by the retailer. We prove that for a zero salvage value and some expected demand functions, in equilibrium, the manufacturer may elect not to introduce buybacks. On the other hand, if buybacks are introduced in equilibrium, their introduction has an insignificant effect on channel efficiency improvement, but, by contrast, may significantly shift profits from the retailer to the manufacturer. We further demonstrate that the introduction of buybacks increases the wholesale price, retail price, and inventory level, as compared to the wholesale price‐only contract, and that the corresponding vertically integrated firm offers the lowest retail price and highest inventory level. © 2005 Wiley Periodicals, Inc. Naval Research Logistics, 2005.     

Vertically restrictive pricing in supply chains with price‐dependent demand

We examine the behavior of a manufacturer and a retailer in a decentralized supply chain under price‐dependent, stochastic demand. We model a retail fixed markup (RFM) policy, which can arise as a form of vertically restrictive pricing in a supply chain, and we examine its effect on supply chain performance. We prove the existence of the optimal pricing and replenishment policies when demand has a linear additive form and the distribution of the uncertainty component has a nondecreasing failure rate. We numerically compare the relative performance of RFM to a price‐only contract and we find that RFM results in greater profit for the supply chain than the price‐only contract in a variety of scenarios. We find that RFM can lead to Pareto‐improving solutions where both the supplier and the retailer earn more profit than under a price‐only contract. Finally, we compare RFM to a buyback contract and explore the implications of allowing the fixed markup parameter to be endogenous to the model. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006.     

Synchronizing pricing and replenishment to serve forward-looking customers

We incorporate strategic customer waiting behavior in the classical economic order quantity (EOQ) setting. The seller determines not only the timing and quantities of the inventory replenishment, but also the selling prices over time. While similar ideas of market segmentation and intertemporal price discrimination can be carried over from the travel industries to other industries, inventory replenishment considerations common to retail outlets and supermarkets introduce additional features to the optimal pricing scheme. Specifically, our study provides concrete managerial recommendations that are against the conventional wisdom on “everyday low price” (EDLP) versus “high-low pricing” (Hi-Lo). We show that in the presence of inventory costs and strategic customers, Hi-Lo instead of EDLP is optimal when customers have homogeneous valuations. This result suggests that because of strategic customer behavior, the seller obtains a new source of flexibility—the ability to induce customers to wait—which always leads to a strictly positive increase of the seller's profit. Moreover, the optimal inventory policy may feature a dry period with zero inventory, but this period does not necessarily result in a loss of sales as customers strategically wait for the upcoming promotion. Furthermore, we derive the solution approach for the optimal policy under heterogeneous customer valuation setting. Under the optimal policy, the replenishments and price promotions are synchronized, and the seller adopts high selling prices when the inventory level is low and plans a discontinuous price discount at the replenishment point when inventory is the highest.     

Evaluating the potential effects from probabilistic selling of similar products

In this article, we consider an online retailer who sells two similar products (A and B) over a finite selling period. Any stock left at the end of the period has no value (like clothes going out of fashion at the end of a season). Aside from selling the products at regular prices, he may offer an additional option that sells a probabilistic good, “A or B,” at a discounted price. Whenever a customer buys a probabilistic good, he needs to assign one of the products for the fulfillment. Considering the choice behavior of potential customers, we model the problem using continuous‐time, discrete‐state, finite‐horizon dynamic programming. We study the optimal admission decisions and devise two scenarios, whose value functions can be used as benchmarks to evaluate the demand induction effect and demand dilution effect of probabilistic selling (PS). We further investigate an extension of the base MDP (Markov Decision Process) model in which the fulfillment of probabilistic sales is uncontrollable by the retailer. A special case of the extended model can be used as a benchmark to quantify the potential inventory pooling effect of PS. Finally, numerical experiments are conducted to evaluate the overall profit improvement, and the effects from adopting the PS strategy. © 2014 Wiley Periodicals, Inc. Naval Research Logistics, 61: 604–620, 2014     

Untruthful probabilistic demand forecasts in vendor‐managed revenue‐sharing contracts: Coordinating the chain

Vendor‐managed revenue‐sharing arrangements are common in the newspaper and other industries. Under such arrangements, the supplier decides on the level of inventory while the retailer effectively operates under consignment, sharing the sales revenue with his supplier. We consider the case where the supplier is unable to predict demand, and must base her decisions on the retailer‐supplied probabilistic forecast for demand. We show that the retailer's best choice of a distribution to report to his supplier will not be the true demand distribution, but instead will be a degenerate distribution that surprisingly induces the supplier to provide the system‐optimal inventory quantity. (To maintain credibility, the retailer's reports of daily sales must then be consistent with his supplied forecast.) This result is robust under nonlinear production costs and nonlinear revenue‐sharing. However, if the retailer does not know the supplier's production cost, the forecast “improves” and could even be truthful. That, however, causes the supplier's order quantity to be suboptimal for the overall system. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007     

Price and capacity decisions of service systems with boundedly rational customers

We consider price and capacity decisions for a profit‐maximizing service provider in a single server queueing system, in which customers are boundedly rational and decide whether to join the service according to a multinomial logit model. We find two potential price‐capacity pair solutions for the first‐order condition of the profit‐maximizing problem. Profit is maximized at the solution with a larger capacity, but minimized at the smaller one. We then consider a dynamically adjusting capacity system to mimic a real‐life situation and find that the maximum can be reached only when the initial service rate is larger than a certain threshold; otherwise, the system capacity and demand shrink to zero. We also find that a higher level of customers’ bounded rationality does not necessarily benefit a firm, nor does it necessarily allow service to be sustained. We extend our analysis to a setting in which customers’ bounded rationality level is related to historical demand and find that such a setting makes service easier to sustain. Finally we find that bounded rationality always harms social welfare.     

Stability of information‐sharing alliances in a three‐level supply chain

In their recent article, Leng and Parlar (L&P) (2009) analyze information‐sharing alliances in a three‐level supply chain (consisting of a manufacturer, a distributor, and a retailer) that faces a nonstationary end demand. Supply chain members can share demand information, which reduces information distortion and thus decreases their inventory holding and shortage costs. We expand the results from L&P by considering dynamic (farsighted) stability concepts. We use two different allocation rules and show that under some reasonable assumptions there should always be some information sharing in this supply chain. We also identify conditions under which the retailer in a stable outcome shares his demand information with the distributor, with the manufacturer, or with both remaining supply chain members. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Simultaneous price,location, and capacity decisions on a line of time‐sensitive customers

Consider a monopolist who sells a single product to time‐sensitive customers located on a line segment. Customers send their orders to the nearest distribution facility, where the firm processes (customizes) these orders on a first‐come, first‐served basis before delivering them. We examine how the monopolist would locate its facilities, set their capacities, and price the product offered to maximize profits. We explicitly model customers' waiting costs due to both shipping lead times and queueing congestion delays and allow each customer to self‐select whether she orders or not, based on her reservation price. We first analyze the single‐facility problem and derive a number of interesting insights regarding the optimal solution. We show, for instance, that the optimal capacity relates to the square root of the customer volume and that the optimal price relates additively to the capacity and transportation delay costs. We also compare our solutions to a similar problem without congestion effects. We then utilize our single‐facility results to treat the multi‐facility problem. We characterize the optimal policy for serving a fixed interval of customers from multiple facilities when customers are uniformly distributed on a line. We also show how as the length of the customer interval increases, the optimal policy relates to the single‐facility problem of maximizing expected profit per unit distance. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2007     

Retailer's rationale to refuse consumer returns in supply chains

While accepting consumer returns has long been proposed as a solution to resolve the consumer valuation uncertainty problem, there are still a sizable portion of retailers who insist on a “no return” policy. In this article, we offer an economic rationale for these seemingly unreasonable strategies in a supply chain context. We demonstrate when and why the retailer may benefit from refusing consumer returns, even though offering consumer returns allows the supply chain to implement the expostmarket segmentation. Granting the retailer the right to refuse consumer returns may sometimes improve supply chain efficiency: it eliminates the manufacturer's attempt to induce inefficient consumer returns and bring the equilibrium back to that in the vertically integrated benchmark. We also find that the refund and the retail price can move in the opposite directions when product reliability varies, and consumer returns have a nontrivial impact on the quality choice. © 2015 Wiley Periodicals, Inc. Naval Research Logistics 62: 686–701, 2015     

The value of information sharing in a two‐stage supply chain with production capacity constraints

We consider a simple two‐stage supply chain with a single retailer facing i.i.d. demand and a single manufacturer with finite production capacity. We analyze the value of information sharing between the retailer and the manufacturer over a finite time horizon. In our model, the manufacturer receives demand information from the retailer even during time periods in which the retailer does not order. To analyze the impact of information sharing, we consider the following three strategies: (1) the retailer does not share demand information with the manufacturer; (2) the retailer does share demand information with the manufacturer and the manufacturer uses the optimal policy to schedule production; (3) the retailer shares demand information with the manufacturer and the manufacturer uses a greedy policy to schedule production. These strategies allow us to study the impact of information sharing on the manufacturer as a function of the production capacity, and the frequency and timing in which demand information is shared. © 2003 Wiley Periodicals, Inc. Naval Research Logistics, 2003     

Coordination mechanisms for a three‐stage reverse supply chain to increase profitable returns

In this article, we consider a generic electronic product that can be remanufactured or recycled at the end of its life cycle to generate new profit. We first describe the product return process and then present a customer segmentation model to capture consumers' different behaviors with respect to product return so that the retailer can work more effectively to increase the return volume. In regard to the collaboration between the retailer and the manufacturer, we explore a revenue‐sharing coordination mechanism for achieving a win‐win outcome. The optimality and sensitivity of the critical parameters in four strategies are obtained and examined both theoretically and numerically, which generate insights on how to manage an efficient consumer‐retailer‐manufacturer reverse supply chain, as well as on the feasibility of simplifying such a three‐stage chain structure. © 2012 Wiley Periodicals, Inc. Naval Research Logistics, 2013     

Locational tying of complementary retail items

We study a selling practice that we refer to as locational tying (LT), which seems to be gaining wide popularity among retailers. Under this strategy, a retailer “locationally ties” two complementary items that we denote by “primary” and “secondary.” The retailer sells the primary item in an appropriate “department” of his or her store. To stimulate demand, the secondary item is offered in the primary item's department, where it is displayed in very close proximity to the primary item. We consider two variations of LT: In the multilocation tying strategy (LT‐M), the secondary item is offered in its appropriate department in addition to the primary item's department, whereas in the single‐location tying strategy (LT‐S), it is offered only in the primary item's location. We compare these LT strategies to the traditional independent components (IC) strategy, in which the two items are sold independently (each in its own department), but the pricing/inventory decisions can be centralized (IC‐C) or decentralized (IC‐D). Assuming ample inventory, we compare and provide a ranking of the optimal prices of the four strategies. The main insight from this comparison is that relative to IC‐D, LT decreases the price of the primary item and adjusts the price of the secondary item up or down depending on its popularity in the primary item's department. We also perform a comparative statics analysis on the effect of demand and cost parameters on the optimal prices of various strategies, and identify the conditions that favor one strategy over others in terms of profitability. Then we study inventory decisions in LT under exogenous pricing by developing a model that accounts for the effect of the primary item's stock‐outs on the secondary item's demand. We find that, relative to IC‐D, LT increases the inventory level of the primary item. We also link the profitability of different strategies to the trade‐off between the increase in demand volume of the secondary item as a result of LT and the potential increase in inventory costs due to decentralizing the inventory of the secondary item. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009     

Optimal inventory and dynamic admission policies for a retailer of seasonal products with affiliate programs and drop‐shipping

This article investigates the optimal inventory and admission policies for a “Clicks‐and‐Bricks” retailer of seasonal products that, in addition to selling through its own physical and online stores, also sells through third‐party websites by means of affiliate programs. Through postings on partners' webpages, an affiliate program allows a retailer to attract customers who would otherwise be missed. However, this retailer needs to pay a commission for each sale that originates from the website operators participating in the program. The retailer may also refer online orders to other sources (such as distributors and manufacturers) for fulfillment through a drop‐shipping agreement and thus earns commissions. This would be an option when, for example, the inventories at the physical stores were running low. Therefore, during the selling horizon, the retailer needs to dynamically control the opening/closing of affiliate programs and decide on the fulfillment option for online orders. On the basis of a discrete‐time dynamic programming model, the optimal admission policy of the retailer is investigated in this paper, and the structural properties of the revenue function are characterized. Numerical examples are given to show the revenue impact of optimal admission control. The optimal initial stocking decisions at the physical stores are also studied. © 2009 Wiley Periodicals, Inc. Naval Research Logistics 2009     

A produce‐to‐stock system with advance demand information and secondary customers

We consider a manufacturer (i.e., a capacitated supplier) that produces to stock and has two classes of customers. The primary customer places orders at regular intervals of time for a random quantity, while the secondary customers request a single item at random times. At a predetermined time the manufacturer receives advance demand information regarding the order size of the primary customer. If the manufacturer is not able to fill the primary customer's demand, there is a penalty. On the other hand, serving the secondary customers results in additional profit; however, the manufacturer can refuse to serve the secondary customers in order to reserve inventory for the primary customer. We characterize the manufacturer's optimal production and stock reservation policies that maximize the manufacturer's discounted profit and the average profit per unit time. We show that these policies are threshold‐type policies, and these thresholds are monotone with respect to the primary customer's order size. Using a numerical study we provide insights into how the value of information is affected by the relative demand size of the primary and secondary customers. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007     

Coordination of pricing and inventory control across products

We consider the joint pricing and inventory‐control problem for a retailer who orders, stocks, and sells two products. Cross‐price effects exist between the two products, which means that the demand of each product depends on the prices of both products. We derive the optimal pricing and inventory‐control policy and show that this policy differs from the base‐stock list‐price policy, which is optimal for the one‐product problem. We find that the retailer can significantly improve profits by managing the two products jointly as opposed to independently, especially when the cross‐price demand elasticity is high. We also find that the retailer can considerably improve profits by using dynamic pricing as opposed to static pricing, especially when the demand is nonstationary. © 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2009