Inconsistency of a retailer's optimal policies and channel performance under revenue sharing contracts

Abstract

In this paper, a one-retailer and two-manufacturer supply chain is modeled by incorporating both revenue sharing contracts and product substitution (i.e., two products from different manufacturers) to investigate their effects on supply chain decisions and performance. First, we independently derive the retailer's optimal ordering policy and retail pricing policy for two products and identify the dynamic inconsistency phenomenon in the retailer's optimal retail pricing policies. Second, we analyze the effect of product substitution and revenue sharing coefficients on the retailer's decisions. Through a comparative analysis of two scenarios (i.e., independent and integral decision making for the two products), we quantify the difference in the retailer's optimal decisions. In addition, we find that a larger substitution rate results in a larger retail price difference between two products. Third, we provide the manufacturers' optimal decisions under a Nash equilibrium and show that revenue sharing contracts can achieve supply chain coordination and Pareto improvement.