Short-Term Discounting Trade Promotions

Manufacturers use trade promotions to offer a discounted price to retailers and set a time period over which the discount is effective. For example, a manufacturer of canned soup may offer a price discount of 10 percent for the shipping period December 15 to Jannary 25. For all purchases within the specified time horizon, retailers get a 10 percent disconnt. In some cases, the manufacturer may require specific actions from the retailer, such as displays, advertising, promotion, and so on, to qualify for the trade promotion. Trade promotions are qnite common in the consumer packaged-goods industry, with manufacturers promoting different products at different times of the year. 

The goal of trade promotions is to influence retailers to act in a way that helps the manufacturer achieve its objectives. The following are a few of the key goals (from the manufacturer s perspective) of a trade promotion (see Blattberg and Neslin [1990] for more details)  

Induce retailers to use price discounts, displays, or advertising to spur sales. 

Shift inventory from the manufacturer to the retailer and the customer. 

Although these may be the manufacturer s objectives, it is not clear that they are always achieved as the result of a trade promotion. Our goal in this section is to investigate the impact of a trade promotion on the behavior of the retailer and the performance of the entire supply chain. The key to understanding this impact is to focus on how a retailer reacts to a trade promotion that a manufacturer offers. In response to a trade promotion, the retailer has the following options  

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Faced with a short-term discount, it is optimal for retailers to pass through only a fraction of the discount to the customer, keeping the test for themselves. Simultaneously, it is optimal for retailers to increase the purchase lot size and forward huy for future periods. Thus, trade promotions often lead to an increase of cycle inventory in a supply chain without a significant increase in customer demand. 

The supplier offers short-term price discounts or holds trade promotions. 

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