African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4154

Full Length Research Paper

Equilibrium analysis and Pareto improvement of a supply chain under revenue sharing contract with consignment and slotting allowances

Jen-Ming Chen1*, Hung-Liang Cheng1 and Mei-Chen Chien2
Institute of Industrial Management, National Central University 300, Jhongda Road, Jhongli City, Taoyuan County, Taiwan, 32001, R.O.C. 2Department of Industrial and Technology Management, Vannung University Jhongli City, Taoyuan County, Taiwan 32001, R.O.C.  
Email: [email protected]

  •  Accepted: 17 February 2011
  •  Published: 30 September 2011

Abstract

Revenue sharing contract with consignment is prevalent in internet commerce, video rental, vending machine, and used-book merchandising. Under such a contract, the study models the decision-making of a supply channel with one manufacturer and one retailer as a Stackelberg game. The retailer, acting as the leader, offers the manufacturer a revenue sharing contract, which specifies the percentage allocation of revenue between her and the manufacturer. The manufacturer chooses a retail price as a response. The study conducts equilibrium analysis for both the centralized and decentralized channel settings with and without cooperation. The study reveals that the profit loss due to non-cooperative decentralization is significant, and it tends to have a consistent bias that is setting higher retail price by the manufacturer and higher revenue-sharing percentage by the retailer. Notably, the loss is increasing in the price elasticity of demand and decreasing in the retailer’s cost-share. In other words, the cooperative decentralization will generate more profit than that of the non-cooperative if the retailer’s cost-share is small and/or the elasticity is high. In addition, a profit-sharing scheme through slotting allowance is proposed to achieve perfect coordination, which leads to Pareto improvements among channel participants.

 

Key words: Game theory, supply chain management, channel coordination, revenue-sharing.