Optimisation of online retailer pricing and carrier capacity expansion during low-price promotions with coordination of a decentralised supply chain

Abstract

In recent years, many online retailers in China set low prices on 11 November, which stimulates huge delivery demand and results in many problems although carriers make an effort to increase their delivery capacities temporarily. To circumvent this difficulty, we consider a supply chain consisting of an online retailer, who can set price to influence the demand, and a capacitated carrier, whose capacity can be expanded at a high cost. We derive the optimal decisions in the centralised and decentralised decision systems, and compare the performances of the two systems. We find that the optimal decisions, and which system has lower price, larger capacity increment, and more late delivered goods depends on the model parameters (the market scale, the late delivery costs, the capacity expansion cost, the delivery fee, and the demand uncertainty). Specially, we show that, contrary to the traditional channel, the online retailer in the decentralised system may set lower price and the carrier has less incentive to expand capacity in the decentralised system in some situations, which underlines the need for coordination. In addition, we propose coordination contracts to improve the overall performance of the supply chain under deterministic and random demands.

Keywords:

• supply chain
• coordination contract
• e-business
• pricing
• capacity

Additional information

Funding

This work was supported in part by the National Natural Science Foundation of China [grant number 71390334], [grant number 71661167009] and Beijing Logistics Informatics Research Base. Cheng was also supported in part by The Hong Kong Polytechnic University under the Fung Yiu King-Wing Hang Bank Endowed Professorship in Business Administration.