I am a new subscriber. I am looking forward to reading your future articles and catching up on your past offerings.
In the cupcake scenario I see another solution that may be beneficial. Since the pain points for the baker and distributor are 9 cupcakes either side of the optimal 100 cupcakes, suppose the baker offers a discount only on the cupcakes above the distributor's pain point. The first 91 cupcakes are $2 each and each additional cupcake is $1.50 so the risk is more evenly distributed. I doubt my back of the napkin calculations are correct but, does the concept make sense to you?
Ed -- thank you for reading. I think you're absolutely right. This amounts to a volume discount, right? Using your parameters, the retailer's expected profit is maximized at a quantity of 102 cupcakes, with expected profit $80.99. (The baker is still happy to make as many as possible.) You could drop the high-volume transfer price further to get up to Q = 109.
Interesting newsletter.
I am a new subscriber. I am looking forward to reading your future articles and catching up on your past offerings.
In the cupcake scenario I see another solution that may be beneficial. Since the pain points for the baker and distributor are 9 cupcakes either side of the optimal 100 cupcakes, suppose the baker offers a discount only on the cupcakes above the distributor's pain point. The first 91 cupcakes are $2 each and each additional cupcake is $1.50 so the risk is more evenly distributed. I doubt my back of the napkin calculations are correct but, does the concept make sense to you?
Ed -- thank you for reading. I think you're absolutely right. This amounts to a volume discount, right? Using your parameters, the retailer's expected profit is maximized at a quantity of 102 cupcakes, with expected profit $80.99. (The baker is still happy to make as many as possible.) You could drop the high-volume transfer price further to get up to Q = 109.