Retailer or e-tailer? Strategic pricing and economic-lot-size decisions in a competitive supply chain with drop-shipping

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

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Original languageEnglish
Pages (from-to)1645-1653
Journal / PublicationJournal of the Operational Research Society
Issue number11
Publication statusPublished - Nov 2010


Drop-shipping is an arrangement whereby an e-tailer, who does not hold inventories, processes orders and requests a manufacturer to ship products directly to the end customers. To explore the economic benefits of adopting drop-shipping distribution strategy in a competitive environment, we investigate the profitability and the efficiency of the drop-shipping channel as compared to the traditional channel. Specifically, we develop Economic Order Quantity (EOQ) games with pricing and lot-sizing decisions to examine the strategic interactions between a manufacturer and its retailer/e-tailer in the traditional/drop-shipping distribution channels. We identify conditions under which the drop-shipping channel profitably outperforms the traditional one. It is found that the economic interests of adopting drop-shipping distribution for the channel members may not always be consistent. There are cases where only the manufacture would favour drop-shipping. In this study, we also reveal that the inefficiency caused by lack of coordination in the traditional channel can be alleviated in the drop-shipping channel where the lot-sizing decision is made by the manufacturer. © 2010 Operational Research Society Ltd.

Research Area(s)

  • conflict analysis, distribution channel, game theory, inventory, supply chain analysis