Coordination and Revenue Sharing Contract with the Newsvendor Problem

Abstract

Supply chain coordination can be achieved by adopting the revenue sharing contract. Typically in this literature, market parameters such as demand distribution and selling price are exogenous. However, incorporating these factors, we can provide an excellent vehicle for how the revenue sharing contract interacts with the newsvendor problem to influence decision-making in the supply chain. This problem is similar to the classic revenue sharing contract-design problem, except: (a) demand distribution is selling price independent; (b) both the selling price and stocking level are decision variables. We consider two different ways in which selling price affects the demand distribution: the additive fashion and multiplicative fashion. We present methodology by which the optimization problem with two decision variables can be simplified to a maximization problem over a single variable. We explore conditions that may lead the revenue sharing contract with the newsvendor problem to achieve perfect channel coordination for the additive fashion and multiplicative fashion, respectively. The results indicate that the revenue sharing contract with the newsvendor problem cannot achieve perfect coordination.