Profit-maximization models for a manufacturer-retailer channel under consignment and revenue sharing contract

Under a consignment contract with revenue sharing, a manufacturer decides on the retail price of displayed products, and retains ownership of the goods. For each item sold, the retailer deducts a 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. The retailer, acting as the leader, offers the manufacturer a revenue sharing contract, which specifies the percentage allocation of sales revenue between herself and the manufacturer. The manufacturer, acting as a follower, sets a self-interest retail price as a response. Using a price-sensitive linear demand function, we derive analytic solutions for both the centralized and decentralized regimes of the channel. We proved that the retailer tends to set a higher percentage allocation of the revenue and the manufacturer tends to choose a higher price under the non-cooperative game, which leads to a lower channel profit. Under the cooperative game, the channel can reach 100 percent efficiency, i.e., it can generate as much profit as the centralized channel can.