Stackelberg-equilibrium of pricing and inventory decisions in a supply chain

Pricing and inventory decisions are two important issues which directly affects the revenue and internal costs of a firm. Therefore, integrating these decisions would be of interest. In this paper, a supply chain with manufacturer-Stackelberg structure consisting of a manufacturer and a retailer is considered. The manufacturer offers the wholesale price to the retailer anticipating the retailer's response, while the retailer determines his optimal replenishment cycle and retail price simultaneously. We formulate the problems of both manufacturer and retailer, and characterize the Stackelberg-equilibrium assuming a linear demand model. Furthermore, a numerical experiment is carried out to investigate the sensitivity of the solution on the model parameters. Numerical results show that the retailer will benefit from a higher deterioration rate in the manufacturer-Stackelberg structure.