The effects of reducing demand uncertainty in a manufacturer–retailer channel for single-period products

The retail-market demand for a newsboy-type product is uncertain. The productʹs manufacturer sets: (i) a wholesale price “w/unit” for selling the product to the retailer, and (ii) the refund amount “r/unit” (if any) for unsold units returned by the retailer. Given w and r, the retailer determines: (i) the quantity Q that he orders from the manufacturer, and (ii) the retailer price “p/unit” at which he sells to the consumers. Keeping in mind the retailerʹs freedom to set Q and p in the retailerʹs own interest, the manufacturer needs to determine how to set w and r that are optimal for the manufacturer. For this market structure, this paper studies how the level of retail-market demand uncertainty will affect the decisions (w,r,Q,p), the expected manufacturerʹs profit and the expected retailerʹs profit. Many of the effects turn out to be counter-intuitive with interesting explanations.