Retailer shelf-space management with trade allowance: A Stackelberg game between retailer and manufacturers

Motivated by the significant influence of trade allowance on store operation and the efficiency of shelf-space allocation, this article develops a model for optimizing category-level shelf-space management. A category shelf-space allocation framework with trade allowance is presented and a multi-player Retailer Stackelberg game is introduced to model the interaction between retailer and manufacturers. With this framework, a retailer maximizes profit by taking the manufacturers' trade allowance response into account, which provides a realistic approach of simultaneously determining the shelf-space and trade promotion decisions under the consideration of interactions among products. A piecewise linearization method is employed to reformulate the Mixed Integer Nonlinear Programming (MINLP) problem into a linear MIP problem for optimal solutions. Numerical examples demonstrate significant advantage of the proposed framework and quantitative analysis leads to a variety of managerial insights.