The Optimal Quantity Discount that a Supplier Should Offer

Quantity discounts are a useful mechanism for coordination. Here we investigate such discounts from the supplier's perspective, both from a non-cooperative game-theoretical approach and a joint decision model. Taking into account the price elasticity of demand, this analysis aids a sole supplier in establishing an all-unit quantity discount policy in light of the buyer's best reaction. The Stackelberg equilibrium and Pareto optimal solution set are derived for the non-cooperative and joint-decision cases, respectively. Our research indicates that channel efficiency can be improved significantly if the quantity discount decision is made jointly rather than non-cooperatively. Moreover, we extend our model in three directions: (1) the product is transported by a private fleet; (2) the buyer may choose to offer her customers a different percentage discount than that she obtained from the supplier; and (3) the case of heterogeneous buyers. Numerical case studies are employed throughout the paper to illustrate the practical applications of the models presented and the sensitivity to model parameters