Inventory and marketing policy in a supply chain of a perishable product

Abstract We investigate a two-echelon supply chain comprising a manufacturer and a retailer, who are engaged in a Stackelberg game in which they set the terms of a wholesale price contract for a perishable product. Product demand depends on the selling price, the investment in advertising, and the time a unit spends on the shelf before being sold. The investment in advertising can be made either by the manufacturer, by the retailer or in a cooperative manner. The parties apply an economic order quantity policy, where the cycle length is set endogenously by the leader of the supply chain. We model the decisions of the parties regarding pricing, advertising investment and cycle length, and we investigate how different power balances between the parties affect their decisions and other supply chain measures at equilibrium. In particular, we analyze two cases: manufacturer-leader and retailer-leader. For each one, equilibrium is obtained for two demand forms (one in which the effects of price and advertising on demand are additive, and one in which they are multiplicative). We find that for a given type of advertising investment (cooperative/non-cooperative) and a given cycle length, the variable profit of each party is determined only by that party's role in the game (leader/follower) and not by its identity (manufacturer/retailer). This result is valid for general formulations of the advertising cost function and of the demand. Interestingly, the type of advertising investment (cooperative/non-cooperative) depends on the sequence of decisions, where at equilibrium, the participation of each party in the advertising investment is determined only by its channel power.