Discount Pricing Policies and the Coordination of Decentralized Distribution Systems*

A challenge of supply chain management is to align the objectives, and hence coordinate the activities, of independent supply chain members. In this study, we approach this problem in a simple way by extending traditional quantity discounts that are based solely on buyers' individual order size to discount policies that are based on both buyers' individual order size and their annual volume. We show that discount policies are able to achieve nearly optimal system profit and, hence, provide effective coordination, for a decentralized two‐echelon distribution system, whereby a supplier sells a product to a group of heterogeneous and independent retailers each facing a downward‐sloping demand curve of its retail price. When buyers are heterogeneous, a critical issue of coordination is to motivate different customers to increase their demand and lot size according to their potential so as to improve profits. We show that market heterogeneity presents an effective discriminating factor for the supplier to segment customers in the design of a coordination mechanism.     

JOINT PRODUCT COST ALLOCATION IN THE CONTEXT OF COST-PLUS PRICING DETERMINATIONS WITH NON-UNIFORM MARKUPS

Companies that use cost-based pricing sometimes manufacture products that involve joint cost allocation. A problem with this is that, while product prices are a function of the full cost, joint cost allocation methods using net realizable values depend on the product prices. This paper demonstrates that when all costs and production quantities are known or can be budgeted, it is possible to simultaneously determine unique product prices (having non-uniform markup rates) and cost allocations using the net realizable value method.     

A Generalized Framework for Quantity Discount Pricing Schedules

The use of price to influence a buyer's purchasing behavior and thus improve supply chain coordination has received considerable attention. The vendor and buyer are independent economic entities, each maximizing its own profit. We consider the case of a buyer with fixed annual demand, independent of cost. The vendor's objective is to set a price schedule that encourages the buyer to raise its order quantity, increasing the vendor's profits. We present a unified treatment of the problem, categorize different variations, and provide a common solution procedure for all cases.