Two echelon supply chain with price dependent demand and premium payment scheme

Supply chain mechanisms that deal with price variation and shortage gaming needs special attention because both are considered as the main causes of the bullwhip effect. Shortage gaming, forces capacity-constrained supplier to curtail the supply to manage the demand of retailers from existing capacity. To avoid the risk of shortages, retailers manipulate their demand and generate the bullwhip effect. Moreover, price variation because of price-dependent demand and premium payment schemes also causes the bullwhip effect. Hence, in the present paper, an attempt has been made to investigate a two-echelon supply chain containing one supplier and N retailers under assumptions of the limited capacity constraint and price-dependent demand. Two mathematical models have been developed to decide extended capacity and premium payment scheme. It has been claimed that the presented models mitigate the bullwhip effect in the stated scenario. Numerical analysis has been presented along with the analysis of sensitive factors.