Channel Coordination of Storable Goods

Manufacturers of consumer-packaged goods invest heavily in trade promotions (i.e., temporary wholesale price discounts), but retailer stockpiling often yields trade promotions unprofitable. In this paper, we investigate how a manufacturer should respond to the retailer’s and consumers’ stockpiling ability by contracting with the retailer. Specifically, we examine when the manufacturer should restrict the retailer’s stockpiling ability and when it should issue trade promotions. Our analysis suggests the following. First, the manufacturer should restrict the retailer’s stockpiling ability when the storage cost is low; such restriction also benefits the retailer, resulting in a win-win outcome. Second, the manufacturer should offer trade promotions when the retailer cannot stockpile products and the storage cost is low but raise the wholesale price when the retailer can stockpile products. Third, stockpiling improves channel coordination and increases the manufacturer’s profit; therefore, the manufacturer should design products to be more storable.