How a dominant retailer might design a purchase contract for a newsvendor-type product with price-sensitive demand

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

82 Scopus Citations
View graph of relations


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

Related Research Unit(s)


Original languageEnglish
Pages (from-to)443-458
Journal / PublicationEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 16 Oct 2008


A dominant retailer will purchase a newsvendor-type product from a manufacturer, who incurs a unit manufacturing cost k. The expected retail demand is a function of the unit retail price p. How should the retailer design her purchase contract? For this increasingly prevalent but inadequately studied scenario, we propose plausible adaptations of several contract formats that have been widely studied in the dominant-manufacturer context. For both symmetric-k and asymmetric-k-knowledge situations, we present performance results of these contracts. Our results then reveal that the performance of these contract formats under our scenario differs considerably from what one would surmise from the well-known results published for closely related scenarios. For example, the widely studied buyback and revenue-sharing formats turn out to be largely ineffective when implemented by a dominant retailer. In contrast, the two-part tariff format performs well relative to the theoretically optimal "menu of contracts." Our results highlight the need to study purchase contract formats designed specifically for dominant-retailer newsvendor-product channels. © 2007 Elsevier B.V. All rights reserved.

Research Area(s)

  • Gaming, Purchasing, Supply chain (contracts, coordination)

Citation Format(s)