On channel coordination through revenue-sharing contracts with price and shelf-space dependent demand

Jen Ming Chen, Hung Liang Cheng, Mei Chen Chien

Research output: Contribution to journalArticlepeer-review

49 Scopus citations

Abstract

This paper deals with the problem of coordinating a vertically separated channel under a consignment contract with revenue sharing. We consider the demand of the downstream player, e.g., the retailer, being price and shelf-space sensitive. Under such a setting, the retailer decides on the revenue-sharing percentage and the slotting fee. And the upstream player, e.g., the manufacturer, decides on the retail price and the size of shelf-space. For each item sold, the retailer deducts an agreed-upon percentage from the selling price and remits the balance to the manufacturer. We model the decision-making of the two firms as a Stackelberg game, and carry out equilibrium analysis for both the centralized and decentralized regimes of the channel, with and without cooperation. In addition, a profit sharing scheme through a two-part slotting allowance is proposed, which leads to Pareto improvements among channel participants. Our analysis reveals that the non-cooperative game tends to set a higher revenue-sharing percentage and lower slotting fee by the retailer, and a higher retail price and less display space by the manufacturer, which leads to a lower channel profit. The consistent bias can be perfectly rectified by the cooperative game through the proposed two-part contractual agreement.

Original languageEnglish
Pages (from-to)4886-4901
Number of pages16
JournalApplied Mathematical Modelling
Volume35
Issue number10
DOIs
StatePublished - Oct 2011

Keywords

  • Channel coordination
  • Decision making
  • Game theory
  • Optimization
  • Revenue-sharing

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