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Assessing the Value of Information Sharing in a Promotional Retail Environment

Listed author(s):
  • Ananth. V. Iyer


    (Krannert School of Management, 1310 Krannert Building, Purdue University, West Lafayette, Indiana 47907)

  • Jianming Ye


    (Department of Statistics and CIS, Baruch College, City University of New York, 17 Lexington Avenue, New York, New York 10010)

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    We focus on a logistics system where inventory is held at three levels: the customers, the retail store, and the warehouse. Retail customer segments are heterogeneous and differ in their reservation prices for product as well as their holding costs. They purchase product from a retail store managed by a retailer. The retailer chooses a retail pricing scheme to maximize his expected profit given a model of customer temporal response to retail pricing. This retailer is supplied product from a warehouse managed by a manufacturer. The manufacturer is responsible for maintaining inventory level at the warehouse and providing 100% service level for retailer orders. The manufacturer uses all available information to generate an inventory policy that maximizes expected profit subject to the service-level requirement. We evaluate the manufacturer's optimal expected profit under two possible schemes: (1) no information regarding the timing of retail promotion plans, and (2) full information regarding the timing of retail promotion plans. We show: (1) as the predictability of the sales impact of a promotion decreases, it may be optimal for the retailer to eliminate retail promotions; (2) increased stockpiling tendency of customers increases retailer profits and decreases manufacturer profits; and (3) retail-promotion information sharing can make retail promotions change from being less profitable than no promotions to being more profitable than no promotions for the manufacturer. We show the impact of fitting the model to a grocery store data set that provided data regarding retail sales (and associated prices) of canned tomato soup over two years. We also explore managerial insights suggested by the model.

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    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 2 (2000)
    Issue (Month): 2 (February)
    Pages: 128-143

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    Handle: RePEc:inm:ormsom:v:2:y:2000:i:2:p:128-143
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    1. E. Zabel, 1970. "Monopoly and Uncertainty," Review of Economic Studies, Oxford University Press, vol. 37(2), pages 205-219.
    2. João L. Assunção & Robert J. Meyer, 1993. "The Rational Effect of Price Promotions on Sales and Consumption," Management Science, INFORMS, vol. 39(5), pages 517-535, May.
    3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    4. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    5. Scott A. Neslin & Stephen G. Powell & Linda Schneider Stone, 1995. "The Effects of Retailer and Consumer Response on Optimal Manufacturer Advertising and Trade Promotion Strategies," Management Science, INFORMS, vol. 41(5), pages 749-766, May.
    6. Jeuland, Abel P & Narasimhan, Chakravarthi, 1985. "Dealing-Temporary Price Cuts-by Seller as a Buyer Discrimination Mechanism," The Journal of Business, University of Chicago Press, vol. 58(3), pages 295-308, July.
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