Another reason of discount: Better sales agent should be awarded by lower wholesale price

Abstract

We consider the characteristics of a consignment-based contract with an exogenous retail price in a two-level supply chain that consists of a retailer and a manufacturer. The retailer is in a newsvendor setting, and the market demand is sensitive to the retailer’s sales effort. Before the selling season, the manufacturer offers the retailer a wholesale price. The retailer then simultaneously determines 1) the prospective degree of sales effort for the season and 2) the order quantity for the manufacturer. At the end of the season, the retailer remits a wholesale price to the manufacturer for each item sold. Unsold leftover items, if any, are collected and salvaged by the manufacturer at the manufacturer’s cost. This type of contract can be seen in the Japanese fashion industry. We will focus on how a unit wholesale price set by the manufacturer affects the profit of both the retailer and the manufacturer. The research questions we seek to answer are as follows: As the retailer seeks to maximise his own profit, 1) how does the wholesale price determined by the manufacturer affect the retailer’s response, and 2) how does the retailer’s response affect the manufacturer’s and the channel profits? A threshold wholesale price, which determines the retailer’s optimal reaction to the wholesale price, exists, and the market sensitivity to the retailer’s sales effort has a significant impact on both the retailer’s and the manufacturer’s performances.