Optimal promotion planning—depth and frequency—for a two-stage supply chain under Markov switching demand |
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Authors: | Hisashi Kurata John J Liu |
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Institution: | 1. School of Business Administration, University of Wisconsin-Milwaukee, 3202 N. Maryland Avenue, Milwaukee, WI 53201, USA;2. Department of Logistics, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong |
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Abstract: | In considering the retailer–supplier supply chain, this paper analyzes how a retailer reasonably decides both the depth and frequency of the price discount promotion including or excluding a supplier’s inventory decision. Assuming that the promotion frequency used by the retailer is probabilistic, we model a promotion-inventory decision under an AR(1) demand with a Markov switching promotion regime. After obtaining the optimal promotion plan, our analysis also considers the behavior of the optimal promotion decision; the retailer’s price format selection, either an Every-Day-Low-Price policy (EDLP) or a Promotion policy (HiLo); and the impact of information sharing of promotion status on the system’s performance. Our results suggest that a retailer tends to overpromote if inventory cost is excluded in its promotion decision, that increasing the market share is a preferable action for both the retailer and the supplier, that total margin and price-elasticity play an important role in selecting the price format, and that the profitability for a supplier of sharing promotion information depends on the transition probabilities of the Markov switching regime. |
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Keywords: | Marketing-operations interface Promotion Inventory decision Markov-switching model Supply chain management |
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