Coordinating Supply Chains with Simple Pricing Schemes: The Role of Vendor-Managed Inventories

We provide a broad characterization of the supply chain settings in which perfect coordination can be achieved with a simple wholesale pricing scheme based on constant unit wholesale prices or a single quantity discount scheme. We confine ourselves to two-echelon chains with a single supplier servicing a network of retailers who compete with each other by selecting retail prices (Bertrand competition) or sales quantities (Cournot competition). The general condition permitting perfect coordination with the above simple pricing schemes under general cost and demand functions, is that of echelon operational autonomy: Here, the costs incurred by the supplier for a given vector of sales volumes depends only on operational decisions she controls herself. (At the same time, the costs incurred by the retailers may depend on operational decisions controlled by the supplier.) We show how a Vendor Managed Inventory (VMI) partnership creates echelon operational autonomy (and hence enables coordination with simple pricing schemes), where it would otherwise fail to exist.