How does wholesale price depend on initial inventory at retailer?
by Yigal Gerchak
International Journal of Inventory Research (IJIR), Vol. 3, No. 3, 2016

Abstract: In a decentralised supply chain, the presence of initial inventory at the retailer is believed to cause the manufacturer to set a lower wholesale price than otherwise. But is such always the case? The importance of that question also derives from a multi-period setting where the manufacturer chooses a wholesale price in each period based on initial inventory at retailer. As the wholesale price is decreasing in inventory level, goes the argument, the retailer will 'overstock', referred to as holding 'strategic inventory'. We show that the optimal wholesale price may increase in initial inventory. We initially assume fixed retail price, and later consider a model with price-sensitive demand. We then outline other price-sensitive models based on different demand functions.

Online publication date: Mon, 30-Jan-2017

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