Coordinating a supply chain with price and advertisement dependent stochastic demand

Area of Science:

• Operations Research
• Supply Chain Management
• Game Theory

Background:

• Supply chains face coordination challenges in pricing, ordering, and advertising.
• Retailer demand is stochastic, influenced by price and advertising expenditure.
• Newsvendor-type products present unique inventory and demand uncertainty issues.

Purpose of the Study:

• To investigate coordination strategies in a single-manufacturer, single-retailer supply chain.
• To develop and analyze Stackelberg and cooperative game models for pricing and advertising.
• To demonstrate how revenue-cost-sharing contracts can improve supply chain performance.

Main Methods:

• Development of Stackelberg and cooperative game models.
• Analysis of a supply chain with stochastic demand dependent on price and advertising.
• Assumption of a multiplicative market demand function.
• Derivation of closed-form solutions for the developed models.

Main Results:

• A properly designed revenue-cost-sharing contract can achieve supply chain coordination.
• Such contracts lead to a Pareto improving, win-win situation for channel members.
• The study provides insights into profit allocation based on risk preferences and negotiation power.

Conclusions:

• Revenue-cost-sharing contracts are effective tools for supply chain coordination.
• Coordination can be achieved by aligning manufacturer and retailer incentives.
• Optimal profit allocation requires consideration of individual member characteristics.