Multi-period inventory models with price protection

In an environment with declining sales prices, retailers (or any reseller) often face the risk of buying high and selling low. In order to limit their channel partners’ exposure to such risks and increase the availability of their products in the marketplace, suppliers often offer price protection. With price protection, a retailer is reimbursed with a percentage of the procurement cost declines, for the inventory that the retailer ordered within a given price protection age limit. We study the optimal inventory policy of the retailer under such price protection terms in a multi–period finite horizon setting with stochastic demand. We propose three different models for the treatment of unsatisfied demand. For the case of full backlogging, we show that the order–up–to type policies are optimal. In a numerical study, we study the behavior of the retailer and investigate the impact of price protection terms on the operational performance of the retailer and the supplier under a variety of settings.