Coordination in retailer–carrier channels for long term planning

We study a retailer–carrier channel for the purpose of long term planning and coordination. Here, the term channel represents the business interaction between the retailer and the carrier. The retailer sells a particular item with price‐dependent demand, whereas the carrier is responsible for transporting the item to the retailer's site. We characterize the profit functions of each channel member as well as the total channel profit. We consider two specific channel structures: (i) the centralized channel and (ii) the decentralized channel. Under the first channel structure, the goal is to set the retail price so as to maximize the total channel profit. Under the latter, the carrier and the retailer choose their own policy parameters, i.e., the freight rate for the carrier and the retail price for the retailer, so as to maximize their individual profits. We model the decentralized channel as a Stackelberg Game and propose a coordination mechanism between the retailer and the carrier in which the retailer signals a price multiplier to the carrier. We illustrate that this mechanism could provide win–win solutions for both parties and present analytical and numerical results on the efficiency of channel coordination. We demonstrate that coordination in retailer–carrier channels can be as promising as supplier–retailer channels. We also discuss the effects of retailer–carrier coordination on inventory levels.