Consignment contracts with retail competition

Abstract

Consignment contracts have been widely employed in many industries. Under such contracts, items are sold at a retailer’s but the supplier retains the full ownership of the inventory until purchased by consumers; the supplier collects payment from the retailer based on actual units sold. We investigate how competition among retailers influences the supply chain decisions and profits under different consignment arrangements, namely a consignment price contract and a consignment contract with revenue share. First, we investigate how these two consignment contracts and a price only contract compare from the perspective of each supply chain partner. We find that the retailers benefit more from a consignment price contract than from a consignment contract with revenue share or a price only contract, regardless of the level of retailer differentiation. The supplier’s most beneficial contact, however, critically depends upon the level of retailer differentiation: a consignment contract with revenue share is preferable for the supplier if retailer differentiation is strong; otherwise a consignment price contract is preferable. Second, we study how retailer differentiation affects the profits of all supply chain partners. We find that less retailer differentiation improves the supplier’s profit for both types of consignment contract. Moreover, less retailer differentiation improves profits of the retailers in a consignment price contract, but not necessarily in a consignment contract with revenue share.