The effects of reducing demand uncertainty in a manufacturer–retailer channel for single-period products
Computers & Operations Research, 29 (11):
1583 - 1602 (2002)DOI: 10.1016/S0305-0548(01)00047-8
Abstract
The retail-market demand for a newsboy-type product is uncertain. The product's manufacturer sets: (i) a wholesale price “w/unit” for selling the product to the retailer, and (ii) the refund amount “r/unit” (if any) for unsold units returned by the retailer. Given w and r, the retailer determines: (i) the quantity Q that he orders from the manufacturer, and (ii) the retailer price “p/unit” at which he sells to the consumers. Keeping in mind the retailer's freedom to set Q and p in the retailer's own interest, the manufacturer needs to determine how to set w and r that are optimal for the manufacturer. For this market structure, this paper studies how the level of retail-market demand uncertainty will affect the decisions (w,r,Q,p), the expected manufacturer's profit and the expected retailer's profit. Many of the effects turn out to be counter-intuitive with interesting explanations. Scope and Purpose This paper extends a problem considered (in different variations) in several recent papers in major IE/MS/OR, marketing and economics journals. Somewhat counter-intuitive (and contradictory) results are presented here. Single-period or “newsboy-type” products have been the subject of many recent studies. Practically all these studies assume that there is only one decision-maker; i.e., the vertically integrated “manufacturer-cum-retailer”. As an entirely separate issue, the interactions between a manufacturer and a retailer in a “market channel” have also been widely studied, but mostly in the context of a multi-period product. Both characteristics (“single-period product” and “market channel”) were included in Iyer and Bergen's (Management Science 4) investigation of a manufacturer–retailer channel for fashion goods. Iyer and Bergen considered the effects of demand-uncertainty reduction; they made the following assumptions: I. the manufacturer cannot change the wholesale price; II. the manufacturer does not accept returns from the retailer; and III. the retail price is fixed. With Iyer and Bergen's assumptions I–III relaxed, Emmons and Gilbert (Management Science 8) considered manufacturer–retailer interactions for newsboy products. However, their results do not relate to how demand-uncertainty reduction would affect the manufacturer–retailer interactions (i.e., Iyer and Bergen's question). Our paper shows that when one or more of Iyer and Bergen's three assumptions are relaxed, the effects of demand-uncertainty reduction are significantly different from those depicted in Iyer and Bergen's paper.
