Quantity discount pricing policies for heterogeneous retailers with price sensitive demand

Although quantity discount policies have been extensively analyzed, they are not well understood when there are many different buyers. This is especially the case when buyers face price‐sensitive demand. In this paper we study a supplier's optimal quantity discount policy for a group of independent and heterogeneous retailers, when each retailer faces a demand that is a decreasing function of its retail price. The problem is analyzed as a Stackelberg game whereby the supplier acts as the leader and buyers act as followers. We show that a common quantity discount policy that is designed according to buyers' individual cost and demand structures and their rational economic behavior is able to significantly stimulate demand, improve channel efficiency, and substantially increase profits for both the supplier and buyers. Furthermore, we show that the selection of all‐units or incremental quantity discount policies has no effect on the benefits that can be obtained from quantity discounts. © 2005 Wiley Periodicals, Inc. Naval Research Logistics, 2005