Optimal price and lot size when the supplier offers a temporary price reduction over an interval

Manufacturers and other suppliers offer temporary reduction in the price charged to resellers for a variety of reasons. Typically the trade promotion lasts for some finite time-span. In addition, in reselling situations, the end demand tends to be sensitive to selling price. Thus, when the trade promotion takes place, there is possibility that not all the quantity purchased by the reseller at discount is passed on to the final consumers at a reduced selling price. Studies to date addressing the above problem situation have assumed that the trade promotion is offered by the supplier only at one point in time. We extend the analysis to the more realistic case where the promotion lasts a finite time interval. We consider two cases: (1) using technology (e.g. point-of-sale systems), the supplier can insure that the discount is applicable to only units resold during the promotion and (2) the discount is applicable to units purchased during the promotion.Scope and purposeSuppliers offer temporary price reductions for several operational reasons. When suppliers (i.e. manufacturers, distributors, wholesalers) offer trade promotion in which there is a reduction in the price charged to resellers, the promotion is often planned over a time interval. In addition, in reselling situations end demand is sensitive to the selling price. A complicating factor here is that when the temporary price reduction is offered, there is the possibility that not all units purchased at discount may be passed to the end consumer at a reduced selling price. The existing studies related to the problem situation described above have assumed that the trade promotion is offered by the supplier at only one point in time and/or that the end demand is not sensitive to the selling price. These are restrictive assumptions. In this paper, we extend the earlier analysis to the more general case. We believe that the paper offers insights and procedures which can be used by resellers to plan their response.