A Generalized Quantity Discount Pricing Model to Increase Supplier's Profits

TLDR

A quantity discount pricing model aims to increase vendor profits by incorporating discount constraints and relaxing the lot‑for‑lot assumption. The study investigates how a supplier can use price discounts to influence a sole buyer’s order schedule and size to reduce setup, ordering, and inventory holding costs. The authors generalize Monahan’s model, add discount constraints, relax the lot‑for‑lot policy, and present an algorithm to solve the joint ordering and discount problem. Published in Management Science (198.

Abstract

In this paper, the joint problem of ordering and offering price discount by a supplier to his sole/major buyer is analyzed. The objective is to induce the buyer to alter his order schedule and size so that the supplier can benefit from lower set up, ordering, and inventory holding costs. We generalize the quantity discount pricing model of Monahan (Monahan, J. P. 1984. A quantity discount pricing model to increase vendor profits. Management Sci. 30 (6) 720–726.) to: (1) explicitly incorporate constraints imposed on the amount of discount that can be offered; and (2) relax the implicit assumption of a lot-for-lot (or order-for-order) policy adopted by the supplier. An algorithm is developed to solve the supplier's joint ordering and price discount problem.