Revenue sharing contract under asymmetric information

Abstract

We analyse a two stage supply chain with a single risk neutral manufacturer and a risk neutral retailer in a single period setting. The retailer associates costs towards procurement of the product and its marketing and sales. These costs are often private information of the retailer; the retailer has an incentive to overstate his associated costs to acquire a larger share of revenue. In this paper, assuming retailers have private information about their associated costs we derive an optimal revenue sharing contract as designed by the manufacturer for each of the cost structure of the retailers. The retailer's choice from such a contract menu reveals information about their true cost. We analyse our model under various scenarios; we observe that the proposed revenue sharing contract improves the profit of manufacturer and that of the total supply chain.