Dynamic Pricing and Procurement with Buy-One-Get-One Promotions

Strategic inventory plays a vital role in a manufacturer-retailer dynamic contract. By holding inventories in a period, the retailer curtails the manufacturer’s pricing power in the next period and alleviates double marginalization, significantly increasing the manufacturer’s and retailer’s profits and improving consumer surplus. The retailer’s strategic inventory stems from strategic consideration (dynamic games) regardless of uncertainties, fluctuations, capacities, etc. In this paper, we investigate how consumers’ strategic inventory (i.e., consumer stockpiling) alters the retailer’s strategic inventory as well as the subgame perfect equilibrium. We extend the model of Anand et al. (2008) by adding Buy-One-Get-One (BOGO) promotions in the first period. We show that the retailer has a strong motive to transfer inventory to consumers. Our results hold if consumers are myopic or strategic and anticipate the price in the second period. We also examine our results in a multi-period model over a finite horizon. To compare BOGO to cash-mail-in rebates, we study a manufacturer-to-consumer BOGO in such a dynamic contract. The result reveals that, unlike rebates, the manufacturer does not offer BOGO to consumers but the retailer does, implying that the pricing scheme with BOGO differs from rebates. Finally, we extend our base model to three production cost structures: (1) fixed setup cost; (2) diseconomies of scale; and (3) production cost savings, and find that the cost structure has a significant impact on the optimal supply chain inventory and BOGO promotions decisions.