Retailer's Shelf-Space and Pricing Decisions under Revenue Sharing Contracts

Abstract

In some retail contexts, retailers can often stimulate product sales by offering a price discount or allocating more shelf or display space. The retailer's shelf-space and pricing decisions can affect not only the retailer's profitability but also the supplier's profitability. This paper investigates the impact of revenue sharing contracts on the retailer's shelf-space and pricing decisions. Consider a two-echelon supply chain with a supplier supplying a certain product to a retailer facing non-linear inventory holding costs and the customer demand that depends on both the price of the product and the shelf space allocated. We firstly provide the equilibrium of the optimal decisions of the retailer and the supplier when no revenue sharing contract is offered. Then we consider the case where the supplier replenishes the retailer's shelf under a revenue sharing contract. It is shown that a properly designed revenue sharing contract can increase the profit of the manufacture, comparing to the benchmark case. Finally we conclude that revenue sharing contracts still can not coordinate the supply chain.