Pricing, investment and order quantity decisions in collaboration between a manufacturer and a retailer

Abstract

We consider a supply chain consisting of one manufacturer and one retailer of a product. We assume that customer demand is sensitive towards both price as well as non-price factors. The manufacturer invests to improve quality, and the retailer invests in selling effort to develop the market for the product. We study eight different models of coordination between the manufacturer and the retailer. We examine and discuss the relation between the optimal configuration of investment, price and order quantity from the perspective of the manufacturer and the retailer. The retailer's unit price and total net profit are determined for eight different models of collaboration between the manufacturer and the retailer under lot-for-lot production. Our analysis reveals that total intra and intercoordination results in highest profit for the supply chain. However, collaboration between the manufacturer and the retailer for investments and pricing decisions alone gives profit close to complete intra and intercollaboration. Hence, collaboration between the manufacturer and the retailer for setting a maximum-profit price is recommended. Our model can help firms determine the optimal investments, pricing and stocking.