Inventory, channel coordination and bargaining in a manufacturer-retailer system

Substantial research literature has been developed over the years on the subject of inventory. The more recent literature has examined the fundamental relationships between inventory control and price theory. A significant portion of this literature assumes the ultimate consumer demand as a constant and characterizes the relationship between a manufacturer and a retailer as a leader-follower problem. A primary assumption in these studies is that the manufacturer, as the leader, exerts almost complete control over the behavior of the retailer. However, in practice, the retailer does exert some control over the manufacturer. This paper develops a framework that integrates inventory control with constant demand and the economic relationship between consumer demand and retail price. Within this framework, the impact of order quantity, wholesale price and retail price on the behavior of both the manufacturer and the retailer is investigated. Furthermore, this paper explores the issues and conclusions that result from coordinating the relationship between the manufacturer and the retailer. The present analyses demonstrate that channel coordination can be achieved by utilizing well-known bargaining models. A numerical example is provided to illustrate the theoretical findings.