Pricing and volume discounting for a dominant retailer with uncertain manufacturing cost information

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

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

Related Research Unit(s)


Original languageEnglish
Pages (from-to)848-870
Journal / PublicationEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 1 Dec 2007


A product costs the manufacturer c/unit to produce; the retailer sells it at p/unit to the consumers. The retail-market demand volume V varies with p according to a given demand curve Dp. How would or should the "players" (i.e., the manufacturer and the retailer) set their prices? In contrast to many studies that assume a dominant manufacturer implementing the "manufacturer-Stackelberg" ("[mS]") game, this paper examines how a dominant retailer should operate when his knowledge of c is imperfect. We first derive optimal decisions (some of them counter-intuitive) for the dominant retailer when he is restricted to choosing between [rS] (retailer-Stackelberg) and [mS]. Second, we propose a "reverse quantity discount" scheme that the dominant retailer (i.e., the downstream player) can offer to the manufacturer (note that the standard discount scheme is offered by the upstream player). We show that this discounting scheme is quite effective compared to the considerably more complicated though nevertheless theoretically optimal "menu of contracts." We also reveal a largely overlooked function of discounting; i.e., discounting enables an "ignorant" but dominant player to usurp the earnings attributable to the knowledge of the dominated player. Finally, we also show that discounting works well when the demand curve is linear, but becomes ineffective when the demand curve is iso-elastic - a result echoing the conclusions of some earlier related works. © 2006 Elsevier B.V. All rights reserved.

Research Area(s)

  • Game-theoretic models, Pricing, Supply-chain contracts, Supply-chain coordination