This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Dong, L. Articles by Zhu, K. Search for Related Content

Two-Wholesale-Price Contracts: Push, Pull, and Advance-Purchase Discount Contracts

John M. Olin School of Business, Washington University in Saint Louis, Saint Louis, Missouri 63130
Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
dong{at}wustl.edu
kzhu{at}ust.hk

The allocation of inventory ownership affects the inventory availability in a supply chain, which in turn determines the supply chain performance. In this paper, we consider a supplier-retailer supply chain in which the supplier starts production well in advance of the selling season, and the retailer is offered two ordering opportunities at different points in time. An early order is allowed before the supplier’s production decision, and a late order is allowed after the completion of production and after observing the demand. When the two wholesale prices change, we illustrate how the inventory decision rights and ownership are shifted and/or shared between the two firms, resulting in push, pull, or advance-purchase discount contracts. We then characterize the complete set of Pareto-dominant contracts for any given two-wholesale-price contract. We find that Pareto improvement can be achieved when inventory ownership is shifted from individual to shared and sometimes vice versa. In the latter case, push contracts not only are more likely to offer Pareto improvement, but also can achieve higher supply chain efficiency than pull contracts. We also identify conditions that enable Pareto improvement by introducing a new ordering opportunity to firms that had been bound by a single ordering opportunity without renegotiating the existing wholesale price, and we demonstrate through a numerical study that the adoption of the new ordering opportunity can significantly improve supply chain efficiency. We show that such Pareto improvement is more likely to happen when demand is more volatile.

Key Words: Pareto improvement; contracting; pricing; advance purchase; newsvendor model
History: Received: January 11, 2006; accepted: December 14, 2006.

This article has been cited by other articles:

				J. Miyaoka and W. H. Hausman How Improved Forecasts Can Degrade Decentralized Supply Chains MSOM, June 1, 2008; 10(3): 547 - 562. [Abstract] [PDF]