Pricing and Channel Choice under Consignment Contract

In a consignment contract between manufacturer and retailers, the manufacturer determines the final price and the sales channel and make the choice of whether adding a direct channel or not. Based on the framework of Stackelberg game, we analyze the optimal channel choice and pricing of manufacturer under environment of stochastic demand. We find the manufacturer will benefit from adding a direct channel when the operational cost is relatively low, and the increasing demand fluctuation (uniform distributed) will only strengthen both manufacturer and retailer´s preferences for their channel choice. Only when the price elasticity is relatively small, adding direct channel can be beneficial to both the manufacturer and the retailer.