Coordinating Inventory and Pricing Decisions Under Total Minimum Commitment Contracts

Abstract

A total minimum commitment contract is a supply contract under which a firm commits to buying a minimum quantity of a product from its supplier during the contract duration (e.g., 1 year). Such contracts are widely used in industries, because they provide the buyer with flexibility in terms of the timing and size of each order and the supplier with a guaranteed total order volume. Previous studies on such contracts have focused primarily on the firm's inventory decisions, and none of them has considered the coordination of inventory and pricing decisions. In this study, we fill this gap by studying dynamic inventory and pricing problems under a commitment contract. Under a general demand model with backlogging and zero lead time, we prove that the optimal policy is a committed-inventory-position-dependent basestock list-price policy and characterize its structural properties. We also conduct an extensive numerical study to derive further managerial insights. In particular, we find that dynamic pricing can substantially improve the firm's profitability and enables it to select contracts with large committed quantities and price discount rates, and that ignoring the commitment in joint pricing and ordering decisions can result in substantial profit loss. Finally, we partly extend our results to a lost-sales model and a backlogging model with lead times.

E‐retailer's dynamic inventory and pricing policy with price‐protection services

“…This leads that the standard concave optimization method cannot be adopted directly. Instead, they develop some other methods to verify the concavity of the profit-to-go function, such as making a technical transformation (Chen et al, 2016), introducing an auxiliary decision variable (Gong et al, 2021), or by showing the monotone price path (Feng et al, 2020). In comparison, both conditions do not hold for the present study.…”

“…However, condition 1 or 2 could fail in some other similar studies. For example, condition 1 fails in Chen et al (2016), Hu et al (2019), andWang et al (2021), while condition 2 fails in Gong et al (2021), Feng et al (2020, Yang and Zhang (2021). This leads that the standard concave optimization method cannot be adopted directly.…”

Analyzing rational decision‐making's effect: Empirical evidence from Green supply chain

“…Recent literature has delved into various biases, including overconfidence and optimism (Kirshner & Shao, 2019;Mahajan, 1992;Wu & Chen, 2020), fairness concerns (Du et al, 2014(Du et al, , 2018Pan et al, 2020), and managerial commitments (Gong et al, 2021;Shafiq & Savino, 2019;Sull, 2003). These existing literatures have studied the impact of rational (irrational) decision-making by managers.…”

Capacity management for a leasing system with different equipment and batch demands

“…Shen et al (2019) investigated the joint ordering, expediting, and allocation policy for an inventory system with multiple demand classes. Gong et al (2022) explored the joint inventory control and pricing policy for a firm that has total minimum commitment contracts with its supplier. In the above studies, inventories were used only once.…”

“…Gong et al. (2022) explored the joint inventory control and pricing policy for a firm that has total minimum commitment contracts with its supplier. In the above studies, inventories were used only once.…”