Improving buyer-seller system cooperation through inventory control

Abstract

Much of the literature pertaining to inventory control systems assumes a perfectly competitive market in which increases or decreases in the buyer's purchase costs affect neither the final retail price nor consumer demand. This paper attempts to contribute results to the more recent literature characterized by the buyer-seller in a monopolistic market. The focus is on issues and advantages of improving buyer-seller cooperation in an inventory control system. Two inventory models are structured in a game framework. In the first model a noncooperative relationship (transaction) is assumed in which the seller, as the leader, makes the first decision and then the buyer, as the follower, makes its decision. The unique equilibrium of the game is obtained and found to coincide with the classical EOQ result. In the second model, the leader-follower relationship is relaxed and a scenario is examined in which the seller and the buyer cooperatively maximize their joint system profit. Comparison of the two models reveals that 1. (a) the total system profit is higher at cooperation than at noncooperation, 2. (b) the optimal order quantity of the buyer is higher at cooperation than at noncooperation, 3. (c) the wholesale price of the seller to the buyer is lower at cooperation than at noncooperation. It is also demonstrated that a quantity discount approach is an effective mechanism for achieving system cooperation.