Decision Sciences Journal
Volume 28, Number 3
Summer 1997
Optimal Policy for a Reseller When the Supplier Offers a
Temporary Reduction in Price
Prakash L. Abad
DeGroote School of Business, McMaster University, Hamilton,
Ontario, Canada L8S 4M4
ABSTRACT
A common practice in product distribution is the case in which the
supplier offers a temporary reduction in price. It is suggested in
the literature that in such situations, the reseller may engage in
forward buying (i.e., purchasing additional stock at the reduced
price offered by the supplier for later sale at the regular selling
price). In this paper, a model is formulated of the reseller's
response when the supplier offers a temporary reduction in price.
It is assumed that the market demand for the product is elastic
with respect to the selling price the reseller sets. A procedure
for determining the optimal response of the reseller is developed.
The model presented in this paper can easily be adapted to the case
in which the reseller faces a permanent increase in the price
charged by the supplier.
Subject Areas: Distribution Channels, Inventory Theory, Lot
Sizing, and Pricing.
|