Channel coordination for a newsvendor problem with return and quantity discount

This paper deals with an area of emerging research: managing a supply chain which produces and sells a fixed lifetime product in the marketplace. The newsvendor supply chain problem is formulated as a Stackelberg game: the manufacturer is the leader who designs a contract or a trade term, and the retailer is the follower who determines the order quantity and selling price. In addition, the perishable retailing problem is formulated as a two-period inventory system where the first period represents the inventory of newarrival items and the second period represents the inventory of aged items that are out of season but still usable. We develop profit-maximization models by taking into account the return policy and quantity discount that are offered by the manufacturer to the retailer. It can be shown that the supply chain forged with such policies is effective in reducing the effect of double marginalization. With properly designed contracts, the inefficiency caused by double marginalization can be completely eliminated and, as a result, the supply chain is coordinated which leads to Pareto improvements among the channel participants.