Optimal promotion planning-depth and frequency-for a two-stage supply chain under Markov switching demand

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  • Hisashi Kurata
  • John J. Liu


Original languageEnglish
Pages (from-to)1026-1043
Journal / PublicationEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 1 Mar 2006
Externally publishedYes


In considering the retailer-supplier supply chain, this paper analyzes how a retailer reasonably decides both the depth and frequency of the price discount promotion including or excluding a supplier's inventory decision. Assuming that the promotion frequency used by the retailer is probabilistic, we model a promotion-inventory decision under an AR(1) demand with a Markov switching promotion regime. After obtaining the optimal promotion plan, our analysis also considers the behavior of the optimal promotion decision; the retailer's price format selection, either an Every-Day-Low-Price policy (EDLP) or a Promotion policy (HiLo); and the impact of information sharing of promotion status on the system's performance. Our results suggest that a retailer tends to overpromote if inventory cost is excluded in its promotion decision, that increasing the market share is a preferable action for both the retailer and the supplier, that total margin and price-elasticity play an important role in selecting the price format, and that the profitability for a supplier of sharing promotion information depends on the transition probabilities of the Markov switching regime. © 2006 Elsevier B.V. All rights reserved.

Research Area(s)

  • Inventory decision, Marketing-operations interface, Markov-switching model, Promotion, Supply chain management