Marketing/inventory interactions in the characterization of retailer response to manufacturer trade deals

This paper presents a characterization of a profit‐maximizing retailer's response to a manufacturer trade deal that encompasses both marketing and operations concerns. Price pass‐through behaviour is based on demand being realized over time, at a given rate, thereby allowing for the introduction of inventory‐related costs. The analysis establishes a direct and positive link between the incidence of forward buying and the incidence of more‐than‐100% price pass‐through policies. As a result, unless restricted by anti‐hoarding policies, the profit‐maximizing retailer's strategy tends towards large price reductions, but only for a small fraction of the units acquired at the discounted price. Copyright © 2006 John Wiley & Sons, Ltd.