Is a ‘free lunch’ a good lunch? The performance of zero wholesale price-based supply-chain contracts

Abstract

In the real world, some manufacturers supply their products to retailers at a zero wholesale price (ZWP), and receive compensation by sharing the revenue or receiving some side payment from the retailers. In this paper, we analyse this kind of ZWP-based supply-chain contract. In the basic model, ordering is done either by the manufacturer or the retailer. For both of these cases, we explore ZWP-revenue-sharing (ZR) contracts, ZWP-side-payment (ZS) contracts, and ZWP-revenue-sharing-plus-side-payment (ZRS) contracts. We prove that, irrespective of the ordering scenario being retailer-led or manufacturer-led, only a ZRS contract can achieve win-win coordination. In the extended models, we first study the scenario with multiple products and discuss how a generalised ZRS contract can coordinate the supply chain efficiently. We then investigate greedy wholesale price (GWP)–based contracts, in which the manufacturer charges the retailer a wholesale price equal to the retail price. We find that a GWP-based revenue-sharing-plus-side-payment (GRS) contract and a ZRS contract can both achieve win-win coordination. However, the ZRS contract mean-variance dominates the GRS contract in bringing a lower level of risk to both the retailer and manufacturer if the unit production cost is sufficiently small. We further discuss cases of differences in the perception of ZWP versus non-ZWP contracts. Important managerial insights are derived from the findings.