A manufacturer’s production and pricing strategies with a salvage channel

Dennis Z. Yu and Chen Xiang

International Journal of Production Research, 2017, vol. 55, issue 2, 347-357

Abstract: We study a manufacturer’s production quantity and pricing decisions when the manufacturer has an opportunity to sell surplus inventory through a salvage channel. Before sales begin, the manufacturer determines the production quantity without knowing customer demand. After demand is realised, the manufacturer first satisfies the demand through primary channel while charging a fixed price or adjusting price to maximise profit. At the end of the selling season, the manufacturer resells surplus inventory through the salvage channel, which can be either integrated with or independent of the manufacturer. The manufacturer’s optimal production quantity and expected profit are investigated under different salvage channel structures. We show that the salvage channel improves the manufacturer’s profitability as well as the availability of the product to potential customers through both primary and salvage channels.

Date: 2017
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DOI: 10.1080/00207543.2016.1176264

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