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Price and Order Postponement in a Decentralized Newsvendor Model with Multiplicative and Price-Dependent Demand

Sauder School of Business, University of British Columbia, Vancouver, British Columbia, Canada V6T 1Z2
Paul Merage School of Business, University of California–Irvine, Irvine, California 92697
daniel.granot{at}sauder.ubc.ca
syin{at}merage.uci.edu

We analyze the effect of price and order postponement in a decentralized newsvendor model with multiplicative and price-dependent demand, wherein the manufacturer sets the wholesale price, and possibly offers a buyback rate, and the retailer determines the order quantity and retail price. Such postponement strategies can be used by the retailer by delaying his operational decisions (order quantity and retail price) until after demand uncertainty is observed. We show how the equilibrium values of the contract parameters and profits are affected by (i) vertical competition, (ii) type of contract (wholesale price-only or buyback), (iii) demand distribution, (iv) form of the expected demand function, and (v) the timing of the retailer's operational decisions. Although in most cases postponement is quite beneficial for the channel members, we show that for some model parameters, due to vertical competition, the expected value of perfect information about demand for price postponement and order postponement may be negative for the channel and even, surprisingly, for both members. We also show that when a buyback option is offered, neither order postponement nor price postponement has an effect on the equilibrium wholesale price, profit allocation ratio between the manufacturer and the retailer, and channel efficiency, and that the equilibrium wholesale price, expected retail price, profit allocation ratio between the manufacturer and the retailer, and channel efficiency in the model with buyback options under either order or price postponement further coincide with their counterparts in the corresponding deterministic model.

Subject classifications: inventory/production; policies; uncertainty; games/group decisions; noncooperative.
History: Received October 2004; revision received January 2007; accepted January 2007.