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Practical and effective contracts for the dominant retailer of a newsvendor product with price-sensitive demand

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  • Wang, Jian-Cai
  • Lau, Amy Hing-Ling
  • Lau, Hon-Shiang

Abstract

A manufacturer supplies a newsvendor product to a dominant retailer, who does not know the manufacturer's unit production cost k. The expected retail demand is a function of the unit retail price p. For this increasingly prevalent but rarely analyzed scenario, we compare the performance of several promising contract formats, including two new contract formats designed explicitly for a dominant retailer to implement, namely: (i) a retailer-implemented two-part tariffs where the retailer charges an upfront lump sum fee besides a fixed percentage markup over any given unit wholesale price, and (ii) a retailer-implemented volume discount scheme. We show that these two new formats perform substantially better than the currently-used practical formats. Thus, they form a basis for a dominant retailer to design a practical and effective purchase contract that approaches the power of the theoretically-optimal but impractical “menu of contracts.”

Suggested Citation

  • Wang, Jian-Cai & Lau, Amy Hing-Ling & Lau, Hon-Shiang, 2012. "Practical and effective contracts for the dominant retailer of a newsvendor product with price-sensitive demand," International Journal of Production Economics, Elsevier, vol. 138(1), pages 46-54.
    • Handle: RePEc:eee:proeco:v:138:y:2012:i:1:p:46-54
    DOI: 10.1016/j.ijpe.2011.12.019
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    3. Chongqi Wu & Kunpeng Li & Tianqin Shi, 2017. "Supply chain coordination with two-part tariffs under information asymmetry," International Journal of Production Research, Taylor & Francis Journals, vol. 55(9), pages 2575-2589, May.
    4. Li, Tao & Sethi, Suresh P. & Zhang, Jun, 2014. "Supply diversification with isoelastic demand," International Journal of Production Economics, Elsevier, vol. 157(C), pages 2-6.
    5. Jadidi, Omid & Taghipour, Sharareh & Zolfaghari, Saeed, 2016. "A two-price policy for a newsvendor product supply chain with time and price sensitive demand," European Journal of Operational Research, Elsevier, vol. 253(1), pages 132-143.
    6. Eriksson, Katarina, 2019. "An option mechanism to coordinate a dyadic supply chain bilaterally in a multi-period setting," Omega, Elsevier, vol. 88(C), pages 196-209.
    7. Chen, Kebing & Xiao, Tiaojun, 2015. "Outsourcing strategy and production disruption of supply chain with demand and capacity allocation uncertainties," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 243-257.
    8. Hsieh, Chung-Chi & Chang, Yih-Long & Wu, Cheng-Han, 2014. "Competitive pricing and ordering decisions in a multiple-channel supply chain," International Journal of Production Economics, Elsevier, vol. 154(C), pages 156-165.
    9. Kebing Chen & Tiaojun Xiao, 2015. "Production planning and backup sourcing strategy of a buyer-dominant supply chain with random yield and demand," International Journal of Systems Science, Taylor & Francis Journals, vol. 46(15), pages 2799-2817, November.

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