Supplier and retailer coordination under stochastic price-dependent demand and fast moving items

Abstract

We consider a centralized supply chain system consisting of a one supplier and one retailer. The customers' demand is a compound Poisson process with price-dependent intensity and continuous batch size distribution. The intensity of the customers' arrivals is assumed to be sufficiently high to use a diffusion approximation of the demand process. We assume that the supplier has complete information about the rational retailer's behavior in the framework of the newsvendor problem. The objective is to find a joint pricing and ordering policy so as to maximize the retailer's expected profit and supplier's profit. The equations for the optimal prices main parts are obtained and the example of the price-intensity dependence is considered.