Optimal strategy in vendor-buyer alliances with quantity discount

This study develops an optimal pricing and replenishment policy of an integrated vendor-buyer inventory system with a finite vendor's replenishment rate. A quantity discount pricing strategy is derived to entice the buyer to order larger lot sizes in order to achieve the positive result of collaboration. A negotiation factor is incorporated to balance the cost saving between the vendor and the buyer. By revising Goyal's model, a significant cost reduction inventory model is derived. A numerical example and sensitivity analysis are carried out to illustrate the theory.