Why Should We Offer Quantity Discounts?

Quantity discounts can be a helpful pricing strategy in the process industry because they result in improved coordination in the supply chain, and lead to extraction of surplus through price discrimination. Consideration should be given to:

- For commodity products for which prices is set by the market, manufacturers can use lot size based quantity discounts to achieve coordination in the supply chain and decrease supply chain cost. Lot size based discounts, however, increase cycle inventory in the supply chain.

- The overall supply chain profit is lower if each stage of the supply chain independently makes its pricing decisions with the objective of maximizing its own profit. A coordinated solution results in a higher overall profit.

- For products for which the firm has market power, two part tariffs or volume based quantity discounts can be used to achieve coordination in the supply chain and maximize profits.

- For products for which a firm has market power, lot size based discounts are not optimal for the supply chain even in the presence of inventory costs. In this environment, either a two part tariff or a volume based discount, with the supplier passing on some of its fixed costs to the customer, is needed for the supply chain to be coordinated and maximize profits.

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