Inventory policy is crucial to all buyers and suppliers. Recent research trends in inventory management and supply chain management have also focused on the impact of customer behavior on the system and the interaction or relationship among supply chain partners. Recently, Sharafali & Co [5] presented some stochastic models of cooperation between the supplier and the buyer, and discussed the effect of cooperation in (s, S) inventory policy. On the other hand, Cheung & Zhang [2] focused on another source of demand information distortion that leads to the well known “bullwhip effect”: customer order cancellation. They find that cancellations, as major sources of inventory information distortion, increases total system costs. In this paper, we treat a supply chain system consisting of the supplier, the buyer and the customer, where the buyer corresponds to a wholesaler, and analyze the effect on (s, S) inventory policies for the supplier and the buyer in the supply chain system from customer order cancellations. We also determine the discount wholesale price of the supplier against the buyer in order to motivate the buyer to cooperate, because the expected profit of the buyer under the cooperative policy that maximizes the total expected profits of the whole system is less than that under the independent policy.