Pricing and ordering policies for price-dependent demand in a supply chain of a single retailer and a single manufacturer

This article may be used for research, teaching and private study purposes. Any substantial or systematic reproduction, redistribution , reselling , loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. This article discusses joint pricing and ordering policies for price-dependent demand in a supply chain consisting of a single retailer and a single manufacturer. The retailer places orders for products according to an EOQ policy and the manufacturer produces them on a lot-for-lot basis. Four mechanisms with differing levels of coordination are presented. Mathematical models are formulated and solution procedures are developed to determine the optimal retail prices and order quantities. Through extensive numerical experiments, we analyse and compare the behaviours and characteristics of the proposed mechanisms, and find that enhancing the level of coordination has important benefits for the supply chain. 1. Introduction The economic order quantity (EOQ) model is a problem in Operations Management that has been extended to apply to newly emerging business environments by many researchers over several decades. Among those works, we are interested in price-inventory models for use in the study of interactions between pricing and ordering policies. Today, markets are very competitive and demand is sensitive to the price. Given that variations in demand significantly influence cost and revenue structures, firms contemplating a price adjustment must consider the resulting variation in demand. Furthermore, as firms compete in the global market, single firms in isolation are finding it increasingly difficult to survive and firm-to-firm competition is rapidly changing to supply-chain-to-supply-chain competition in the global market. This article discusses pricing and ordering policies under price-dependent demand in a supply chain, and examines the behaviours and efficiencies of the proposed coordination mechanisms. Kunreuther and Richard (1971) initiated a price-inventory EOQ model for a linear price– demand function. Arcelus and Srinivasan (1985) presented an EOQ model maximising return on investment for a constant elasticity demand function. Abad (1988a,b) presented mathematical procedures to …