Article ID: | iaor20084451 |
Country: | Netherlands |
Volume: | 177 |
Issue: | 2 |
Start Page Number: | 1026 |
End Page Number: | 1043 |
Publication Date: | Mar 2007 |
Journal: | European Journal of Operational Research |
Authors: | Liu John J., Kurata Hisashi |
Keywords: | programming: markov decision, supply & supply chains, marketing |
In considering the retailer–supplier supply chain, this paper analyzes how a retailer reasonably decides both the depth and frequency of the price discount promotion including or excluding a supplier's inventory decision. Assuming that the promotion frequency used by the retailer is probabilistic, we model a promotion-inventory decision under an AR(1) demand with a Markov switching promotion regime. After obtaining the optimal promotion plan, our analysis also considers the behavior of the optimal promotion decision; the retailer's price format selection, either an Every-Day-Low-Price policy (EDLP) or a Promotion policy (HiLo); and the impact of information sharing of promotion status on the system's performance. Our results suggest that a retailer tends to overpromote if inventory cost is excluded in its promotion decision, that increasing the market share is a preferable action for both the retailer and the supplier, that total margin and price-elasticity play an important role in selecting the price format, and that the profitability for a supplier of sharing promotion information depends on the transition probabilities of the Markov switching regime.