Quantity restrictions and the reseller's response to a temporary price reduction or an announced price increase

Manufacturers and suppliers offer temporary reductions (or permanent increases) in the price charged to the resellers for a variety of reasons. The trade promotion may be offered to the reseller at a single point in time or over a finite time-span. In addition, in reselling situations, the end demand tends to be sensitive to selling price. It is commonly found that under such trade promotion (or in stockpiling to an announced price increase), not all the quantity purchased by the reseller at discount may be passed on to the final consumer at a reduced selling price. In fact, previous studies have shown that it is optimal for the reseller to carry forward some of the quantity purchased at discount and sell it later at the regular price. It has been suggested in the literature that by placing a restriction on the reseller's purchase quantity, the supplier can restrict the reseller's forward buy quantity. In this paper, we evaluate this approach. In the rest of the paper, we present alternate schemes which are easy to administer and which insure that the supplier avoids the spike in demand that occurs in the unconstrained problem.