Price discounting in multi-echelon distribution systems

Designing distribution systems requires two essential decisions, one strategic (i.e., the number of levels between the producer and the customer) and the other tactical (i.e., channel management policies such as trade discounts). While the modeling literature focuses on one or the other, evidence from the field indicates that the two decisions are in fact interactive. In this paper the authors focus on the tactical issue of price rebates, but they frame the problem in the overall context of the firm’s distribution structure. The authors offer a theoretical analysis of a two-stage distribution system and construct an O(nlogn) to optimize the producer’s profit function. They then discuss in detail one potential application for the model in solving gray market conflicts.