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Discrete Dynamics in Nature and Society
Volume 2013 (2013), Article ID 631232, 10 pages
http://dx.doi.org/10.1155/2013/631232
Research Article

Dynamic Pricing and Supply Coordination with Reimbursement Contract under Random Yield and Demand

1School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China
2Lubar School of Business, University of Wisconsin-Milwaukee, Milwaukee, WI 53201-0413, USA

Received 22 May 2013; Revised 14 August 2013; Accepted 2 September 2013

Academic Editor: Tinggui Chen

Copyright © 2013 Guo Li et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper investigates the dynamic pricing and supply chain coordination in a decentralized system that consists of one supplier and one manufacturer, in which both the market demand and production yield are stochastic. We show that the centralized expected profit is jointly concave in the production quantity and order quantity when the price is ex-ante selected. We also derive the equilibrium strategies in the decentralized system and prove that the entire profit of supply chain is inevitably lower than that under centralized system. Based on this, we propose a reimbursement contract to coordinate the decentralized supply chain so as to achieve the maximized profit. It is worth mentioning that, under reimbursement contract, the equilibrium production and order quantities are irrelevant to the manufacturer's risk sharing coefficient but are only determined by the supplier’s risk sharing coefficient.