The effects of reducing demand uncertainty in a manufacturer-retailer channel for single-period products

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. 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 of "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 amulti-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. © 2002 Elsevier Science Ltd. All rights reserved.