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Quantity discounts based on the previous order in a two-period inventory model with demand uncertainty

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  • J-Y Lee

    (University of Houston-Victoria)

Abstract

We examine quantity discount contracts between a manufacturer and a retailer in a stochastic, two-period inventory model. The retailer places an order in each of the two periods to meet stochastic demands. The manufacturer gives the retailer a price discount on purchases in the second period in excess of the first-period order quantity (incremental QDP) or a price discount for all units ordered in the second period if the retailer orders more in the second period than in the first period (all-units QDP). We show that the retailer's optimal ordering decision in the second period depends on the sum of initial inventory and previous order quantity. Our computational study suggests that the QDP contract induces the retailer to buy more in the second period but less in the first period, while the increase of the total order quantity may not be significant; and that it increases the manufacturer's profit only when the wholesale margin is large relative to the retail margin.

Suggested Citation

  • J-Y Lee, 2008. "Quantity discounts based on the previous order in a two-period inventory model with demand uncertainty," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 59(7), pages 1004-1011, July.
    • Handle: RePEc:pal:jorsoc:v:59:y:2008:i:7:d:10.1057_palgrave.jors.2602426
    DOI: 10.1057/palgrave.jors.2602426
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    References listed on IDEAS

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    Cited by:

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    2. Munson, C.L. & Hu, J., 2010. "Incorporating quantity discounts and their inventory impacts into the centralized purchasing decision," European Journal of Operational Research, Elsevier, vol. 201(2), pages 581-592, March.

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