Manufacturer incentives to improve retail service levels

Manufacturer incentives to improve retail service levels

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Article ID: iaor19992173
Country: Netherlands
Volume: 104
Issue: 3
Start Page Number: 437
End Page Number: 450
Publication Date: Feb 1998
Journal: European Journal of Operational Research
Authors: ,
Keywords: game theory, retailing
Abstract:

In this paper we provide a solution to the problem of how a manufacturer can provide an incentive to a separately-owned retailer to raise its service level above the level it would choose on its own. We analyze the effects the manufacturer's incentive has on the individual profits of the retailer and manufacturer, as well as their joint profits. Our work is an application of game theory in which we tackle the problem posed by separate ownership of the two firms and the resulting conflict over the gains from cooperation. We utilize a plausible model for service-sensitive demand, one which is relatively free of ad hoc assumptions. Our approach has the strength that it proposes a credible solution to the problem of manufacturer–retailer cooperation when profits are sensitive to retail service levels. Our results indicate that the optimal level of incentive for the manufacturer and the resulting shares of the manufacturer and retailer in increased profits are particularly sensitive to the underlying variability of demand and to the relative variability of additional demand induced by higher service levels.

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