THE IMPACT OF INVENTORY-SUBSIDY CONTRACTS ON A RETAILER'S SHELF-SPACE AND PRICING DECISIONS

It is well known that retailers can often increase product sales by offering a price discount or allocating more shelf or display space. The retailer's shelf-space and pricing decisions obviously affect the manufacturer's profitability. This research studies how a manufacturer can use inventory-subsidy contracts to influence the retailer's shelf-space and pricing decisions. We model a two-echelon supply chain with a manufacturer supplying some product to a retailer facing demand that depends on both the price of the product and the shelf space allocated. Under a wholesale-price-only contract, the retailer's shelf-space allocation and pricing decisions and their impact on the supply chain efficiency are addressed as a benchmark. We then consider the case where the manufacturer offers an inventory holding subsidy to the retailer, which will induce the retailer to allocate more shelf-space to the product. It is shown that under a certain condition, a properly designed inventory-subsidy contract can increase the profit of both the retailer and the manufacture, comparing to the benchmark case. We further characterize the manufacture's optimal decision on the inventory holding subsidy,, and we explore whether such a supply contract can coordinate-the supply chain.