Note—Comments on “A Quantity Discount Pricing Model to Increase Vendor Profits”

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Abstract
Monahan (Monahan, J. P. 1984. A quantity discount pricing model to increase vendor profits. Management Sci. (June) 720–726.) adapted the quantity discount model of inventory theory to the problem of determining an optimal quantity discount schedule from a vendor's point of view, and opened up an important direction of research. However, his one-item, one-customer, one-vendor model is based on several implicit assumptions that must be judged unreasonable. Monahan must account for the vendor's inventory carrying charges and redefine his variable S2. It is shown that a rational vendor's manufacturing frequency would not be identical to the buyer's ordering frequency if the vendor's manufacturing setup costs are substantially larger than the buyer's ordering costs. A numerical example presented in this note also questions the practical usefulness of Monahan's model even after its theoretical inaccuracies axe corrected. Monahan's model may explain discounts that are a fraction of 1% of the price of an item, but it fails to explain commonly observed magnitudes of quantity discounts, such as 10% of the unit price.

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