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Supply Chain Coordination when Demand Is Shelf-Space Dependent

Author

Listed:
  • Yunzeng Wang

    () (Department of Operations Research & Operations Management, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • Yigal Gerchak

    () (Department of Management Sciences, University of Waterloo, Waterloo, Ontario, Canada N2L 3G1, and Department of Industrial Engineering, Tel-Aviv University, Ramat-Aviv, Tel-Aviv, Israel 69978)

Abstract

Consider a manufacturer or wholesaler who supplies some item to retailers facing demand rates that depend on the shelf or display space that is devoted to that product by themselves and their competitors. The manufacturer, via the use of financial levers at her disposal, wishes to coordinate this decentralized chain while making a profit. We model the physical scenario as one of constant displayed inventory level (on which demand rate depends positively) and continuous replenishment. With a single retailer, we show that to coordinate the channel and make a profit the manufacturer needs to augment the wholesale price lever by another-an inventory holding costs subsidy offered to the retailer. When multiple retailers compete in that product's market, there are two ways to envision and model the demand and market split. One assumes that market demand depends on aggregate inventory displayed, and then splits according to individual display levels. The other "assigns" customers to retailers according to their display levels, and then assumes that purchases are a function of the display level at the retailer selected. We characterize retailers' Nash equilibria in these models, and we explore whether the manufacturer can coordinate such channels.

Suggested Citation

  • Yunzeng Wang & Yigal Gerchak, 2001. "Supply Chain Coordination when Demand Is Shelf-Space Dependent," Manufacturing & Service Operations Management, INFORMS, vol. 3(1), pages 82-87, August.
  • Handle: RePEc:inm:ormsom:v:3:y:2001:i:1:p:82-87
    DOI: 10.1287/msom.3.1.82.9998
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    File URL: http://dx.doi.org/10.1287/msom.3.1.82.9998
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    References listed on IDEAS

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    1. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
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