Does the quantity discount mechanism offer a loophole for retailer collusion? Impacts and responses

The quantity discount mechanism is an effective and widely used tool by manufacturers to encourage downstream retailers to increase their order volumes. As wholesale prices decrease with larger order quantities, retailers have an incentive to collude and achieve joint procurement. Two joint procurement modes—group buying (GB) and agency procurement (AP)—are considered to characterize the phenomenon of retailer collusion. In GB mode, retailers purchase as a group and enjoy the same per-unit wholesale price. In contrast, in the AP mode, a leading retailer assumes responsibility for aggregating orders and submitting the total order to the manufacturer while having the authority to set the resale price. A dual-channel model is developed to investigate joint procurement among competing retailers, aiming to identify its underlying driving forces and impacts. Our findings indicate that, compared to individual purchasing (IP), GB is always attainable for retailers, whereas AP is only attainable under intense competition when retailers are symmetric. We reveal that retailers engaging in joint procurement do not always aim to achieve lower wholesale prices. In some cases, the objective may be to mitigate price competition. This finding suggests that joint procurement by retailers results in a reduction in total order quantity, which significantly diminishes the manufacturer’s profit. In response to the challenges of retailer collusion, we explore the feasibility and potential value of offering a coordinated quantity discount mechanism, wherein the manufacturer gives up the pursuit of maximizing its own profit in favor of optimizing the profits of the entire supply chain, making concessions to the retailers. We identify the scenarios in which a coordinated quantity discount contract can eliminate the loophole for retailer collusion and highlight both the value and necessity of achieving contract coordination.