The effectiveness of revenue‐sharing contract to coordinate the price‐setting newsvendor products' supply chain

Abstract

Purpose

The purpose of this paper is to numerically analyze the coordinating mechanism of the revenue‐sharing contract in newsvendor products' supply chain. The contract considers stochastic and price‐dependent demand.

Design/methodology/approach

The paper presents an analytical model for supply chain contracts and then uses numerical methods with the Stackelberg game to identify the contracts' properties.

Findings

Comparing the revenue‐sharing contract with the price‐only contract, the paper finds that a revenue‐sharing contract does improve supply chain performance. However, the benefits earned by the revenue‐sharing contract differ among the supply chain partners under the impact of demand variability and price‐sensitivity factors. Specifically, the manufacturer will earn a greater share in channel profit in the revenue‐sharing contract than in case of a price‐only contract. Also, the incentive by revenue‐sharing contract could not lead to Pareto improvement. In other words, the retailer's profit in revenue‐sharing contract might be lower than that in price‐only contract.

Research limitations/implications

Management should note that there are additional administrative costs needed to monitor the revenue‐sharing contract. Incorporating these costs into models will yield more insight into the problems. Also, the retailer has more accurate market information due to the proximity to the customers that will lead to a different game mode.

Practical implications

Management such as airlines, hotel, video rental, etc. can adopt this kind of contracts to manage their retailers to obtain the higher channel performance. But they should be careful selecting the revenue sharing proportion. The research limitations also give some suggestion for practical reference.

Originality/value

Many studies have shown that the revenue‐sharing contract can obtain a higher channel performance. However, little attention has been noted that the fraction of shared revenue has a significant impact on the channel performance. To apply this form of incentive in practice, managements should consider the impact of the fraction of shared revenue in the revenue‐sharing contract on supply chain performance. This paper considers these issues.

Citation

Yao, Z., Leung, S.C.H. and Lai, K.K. (2008), "The effectiveness of revenue‐sharing contract to coordinate the price‐setting newsvendor products' supply chain", Supply Chain Management, Vol. 13 No. 4, pp. 263-271. https://doi.org/10.1108/13598540810882152