Designing a quantity discount scheme for a newsvendor-type product with numerous heterogeneous retailers

Abstract

This paper presents a practical approach for designing a quantity-discount ("qd") scheme for a manufacturer who supplies a newsvendor-type product to a large number of heterogeneous retailers. The main components of our approach are: (i) an information structure for handling a large number of heterogeneous retailers with changing identities; and (ii) expected-profit expressions for any given qd scheme. We show that these expected-profit expressions can be easily optimized to produce attractive qd schemes; also, these schemes are shown to be quite robust against errors in parameter estimation. As a significant by-product, our multi-retailer scenario provides a more meaningful framework for designing manufacturer-perspective qd schemes, since we also show in this paper that a single-retailer scenario leads to a degenerate problem. © 2006 Elsevier B.V. All rights reserved.