Optimal price, stock and channel with stochastic demand

Based on a model of Stackelberg game between the manufacturer and the retailer, this paper offers the joint optimization on price, stock and channel for the manufacturer when the market demand is stochastic with linear additive shock. We find that the optimal price is decreasing with price elasticity, while the optimal stock is increasing with revenue share ratio, decreasing with price elasticity and retail channel cost. Simulations reveal that both manufacturer and retailer benefit from the dual-channel structure under certain conditions while such benefit for manufacturer and retailer follow different changing patterns as price elasticity, demand fluctuation and revenue sharing ratio changes.