Supply chain coordination with revenue-sharing contracts: strengths and limitations

Cachon, Gérard P., and Martin A. Lariviere. “Supply chain coordination with revenue-sharing contracts: strengths and limitations." Management science 51.1 (2005): 30-44. [[PDF] northwestern.edu] [[PDF] psu.edu];***

==abstract==

Under a revenue-sharing contract, a retailer pays a supplier a wholesale price for each unit purchased, plus a percentage of the revenue the retailer generates… We demonstrate that revenue sharing coordinates a supply chain with a single retailer (i.e., the retailer chooses optimal price and quantity) and arbitrarily allocates the supply chain’s profit….We find that revenue sharing is equivalent to buybacks in the newsvendor case and equivalent to price discounts in the price-setting newsvendor case. Revenue sharing also coordinates a supply chain with retailers competing in quantities, e.g., Cournot competitors or competing newsvendors with fixed prices. Additionally, revenue sharing does not coordinate a supply chain with demand that depends on costly retail effort.