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Coordinating Independent Buyers in a Distribution System to Increase a Vendor's Profits

We study the coordination of a two-echelon distribution system where a vendor distributes a single product to a set of independent buyers. The problem is analyzed as a Stackelberg game in which the vendor acts as the leader and buyers act as followers. A simple strategy is developed for the vendor to employ a uniform quantity-discount policy to coordinate buyers' replenishment times by the power-of-two policy. Solution procedures are developed for the equilibrium strategy. It is shown that time coordination generally has a substantial benefit for the vendor, although the benefit to the buyers may be limited. Furthermore, uniform quantity discounts to all buyers are normally feasible but not sufficient to achieve perfect channel coordination when buyers act independently. The proposed strategy obtains a high proportion of the maximum benefit under perfect channel coordination.