Retailer's response to alternate manufacturer's incentives under a single-period, price-dependent, stochastic-demand frameworl

This article considers the joint development of the optimal pricing and ordering policies of a profit-maximizing retailer, faced with (i) a manufacturer trade incentive in the form of a price discount for itself or a rebate directly to the end customer; (ii) a stochastic consumer demand dependent upon the magnitude of the selling price and of the trade incentive, that is contrasted with a riskless demand, which is the expected value of the stochastic demand; and (iii) a single-period newsvendor-type framework. Additional analysis includes the development of equal profit policies in either form of trade incentive, an assessment of the conditions under which a one-dollar discount is more profitable than a one-dollar rebate, and an evaluation of the impact upon the retailer-expected profits of changes in either incentive or in the degree of demand uncertainty. A numerical example highlights the main features of the model. The analytical and numerical results clearly show that, as compared to the results for the riskless demand, dealing with uncertainty through a stochastic demand leads to (i) (lower) higher retail prices if additive (multiplicative) error, (ii) lower (higher) pass throughs if additive (multiplicative) error, (iii) higher claw backs in both error structures wherever applicable, and (iv) higher rebates to achieve equivalent profits in both error structures.