A comparison of simple two-part supply chain contracts

Abstract

This paper studies how simple two-part wholesale-price, cost-plus, and revenue-sharing contracts enable the coordination of trade and bilateral non-cooperative effort decisions under uncertainty for a decentralized supply chain consisting of a supplier and a retailer. For all these contracts, the use of an up-front fixed payment is beneficial because it allows separating the supply chain's coordination problem from the allocation of the total supply chain profit across the two parties. In particular, we find that slotting allowances, i.e. fixed payments from the supplier to the retailer, can be optimal in conjunction with a cost-plus and revenue-sharing contract, but not in conjunction with a wholesale-price contract. A performance comparison shows that the wholesale-price contract dominates the more advanced cost-plus and revenue-sharing contract if cost uncertainty is low (and vice versa). Finally, we provide additional insights regarding the optimal design of the contract parameters and the performance of the individual contracts for linear demand functions.