A manufacturer's optimal quantity discount strategy and return policy through game-theoretic approach

Abstract

This study generalised the traditional quantity discount problem with return contracts, in which a manufacturer promises to refund some fraction of the retailer's wholesale price if an item is returned, as a two-stage game. In the first stage the manufacturer and retailer determine the inventory level cooperatively. In the second stage, the manufacturer bargains with the retailer for quantity discount and return schemes to maintain channel efficiency. A menu of discount-return combinations is proposed for the manufacturer to make inventory decisions. The model developed will demonstrate that the return policy can be considered as mirror images of quantity discount strategy. That is, options with more generous return privileges are coupled with higher wholesale prices, whereas the lowest wholesale price comes with very strict limits on returns and a restocking fee for any returned goods.