Performance of Quantity Discount Contract under Supply and Demand Disruptions

Abstract

The quantity discount contract has long been one of the most frequently employed basic supply contracts. However, we must reexamine whether this contract is still effective under supply and demand disruptions that have been frequent recently. We compare three contracts: one quantity discount contract advantageous to the supplier, one quantity discount contract advantageous to the retailer, and one wholesale price contract as a basic case for comparison. We consider various disruption characteristics, such as the occurrence and timing of disruption, and four different disruption types. We find that the quantity discount contract is not always the right choice, especially in an unexpected disruption situation, but it still performs well in not only no disruption but also long-term disruption situations. Even if a disruption occurs, the supplier can be better off through a quantity discount contract, even though the contract choice might devastate the retailer’s profit and harm the supply chain’s long-term health. Thus, for the profit maximization of the entire supply chain or retailer, both the internal and external business conditions need to be carefully considered. We provide in detail the conditions in terms of disruption size and loss as well as the market and production characteristics.