A two-stage supply chain coordination mechanism considering price sensitive demand and quantity discounts

• Published in: European journal of operational research Vol. 264; no. 2; pp. 524 - 533
• Main Authors: Venegas, Bárbara B., Ventura, José A.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 16.01.2018
• Subjects: Game theoretical model; Inventory; Price sensitive demand; Quantity discounts; Supply chain coordination; Game theoretical model; Supply chain coordination; Quantity discounts; Inventory; Price sensitive demand
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2017.06.030

•We explore the coordination between a supplier and a buyer within a decentralized supply chain.•Players face inventory and pricing decisions.•The product traded experiences a price sensitive demand.•We propose both cooperative and non-cooperative approaches.•We illustrate our findings with a numerical example showing the difference in the players’ payoff. This paper explores the coordination between a supplier and a buyer within a decentralized supply chain, through the use of quantity discounts in a game theoretic model. Within this model, the players face inventory and pricing decisions. We propose both cooperative and non-cooperative approaches considering that the product traded experiences a price sensitive demand. In the first case, we study the dynamics of the game from the supplier's side as the leader in the negotiation obtaining a Stackelberg equilibrium, and then show how the payoff of this player could still improve from this point. In the second case, a cooperative model is formulated, where decisions are taken simultaneously, emulating a centralized firm, showing the benefits of the cooperation between the players. We further formulate a pricing game, where the buyer is allowed to set different prices to the final customer as a reaction to the supplier's discount decisions. For the latter we investigate the difference between feasibility of implementing a retail discount given a current coordination mechanism and without it. Finally the implications of transportation costs are analyzed in the quantity discount schedule. Our findings are illustrated with a numerical example showing the difference in the players’ payoff in each case and the optimal strategies, comparing in each case our results with existing work.