Retailer or e-tailer? Strategic pricing and economic-lot-size decisions in a competitive supply chain with drop-shipping

W K Chiang and Y Feng
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W K Chiang: City University of Hong Kong
Y Feng: University of Maryland

Journal of the Operational Research Society, 2010, vol. 61, issue 11, 1645-1653

Abstract: Abstract Drop-shipping is an arrangement whereby an e-tailer, who does not hold inventories, processes orders and requests a manufacturer to ship products directly to the end customers. To explore the economic benefits of adopting drop-shipping distribution strategy in a competitive environment, we investigate the profitability and the efficiency of the drop-shipping channel as compared to the traditional channel. Specifically, we develop Economic Order Quantity (EOQ) games with pricing and lot-sizing decisions to examine the strategic interactions between a manufacturer and its retailer/e-tailer in the traditional/drop-shipping distribution channels. We identify conditions under which the drop-shipping channel profitably outperforms the traditional one. It is found that the economic interests of adopting drop-shipping distribution for the channel members may not always be consistent. There are cases where only the manufacture would favour drop-shipping. In this study, we also reveal that the inefficiency caused by lack of coordination in the traditional channel can be alleviated in the drop-shipping channel where the lot-sizing decision is made by the manufacturer.

Keywords: distribution channel; inventory; supply chain analysis; conflict analysis; game theory (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (8)

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DOI: 10.1057/jors.2009.139

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