Quantity Discounts in Single Period Supply Contracts with Asymmetric Demand Information

We investigate how a quantity discount schedule can be used to influence stocking decisions and supply chain performance in single-period interactions between a supplier and buyer(s). In contrast to much of the work that has been done on single-period supply contracts, we assume that there are no interactions between the supplier and the buyer(s) after demand information is revealed. Furthermore, we assume that there are either heterogeneous buyers or that there is a single buyer that has better information about the distribution of demand than does the supplier. We derive structural properties of this unique problem that facilitate managerial insights and solution procedures. We also identify an interesting similarity between our problem of designing a quantity discount schedule and the problem of designing a product-line along a single dimension of quality. Although these two problems have similarities, the introduction of quantity as the dimension of differentiation among market segments alters the structure of the problem. Specifically, in the design of a quantity discount schedule, a given per-unit price applies to all quantities above a breakpoint, whereas in the traditional product-line design problem, the buyer is restricted to a discrete set of price-quality pairs. (Supply Chain Management, Channel Coordination, Channels of Distribution, Asymmetric Information) ∗Case Western Reserve University, Department of OR and OM, 10900 Euclid Ave., Cleveland, OH 44106 [email protected]. †The University of Texas at Austin, Management Department, CBA 4.202, Austin, TX 78712, [email protected] ‡McKinsey & Co., Inc., 1301 East 9th St., Cleveland, OH 44114 craig [email protected]