Three revenue-sharing variants: their significant performance differences under system-parameter uncertainties

Abstract

In the widely studied ‘revenue sharing’ (hereafter [RS]) contract format, the manufacturer of a product not only charges the retailer a unit wholesale price w, but also requires the retailer to share part of the product's revenue (ie, the unit retail price p) with him. For a product with price-dependent demand, it is well known that if a dominant manufacturer knows the system parameters deterministically, then [RS] gives him the perfect power of simultaneously coordinating the channel and allocating profit arbitrarily. Unfortunately, [RS]'s power deteriorates as the manufacturer's knowledge of the system parameters becomes increasingly uncertain. This paper shows that this deterioration can be substantially reduced by using slightly modified versions of [RS]; these modifications roughly amount to sharing a retailer's gross profit instead of revenue. In other words, this paper presents simple modifications to the classical [RS], leading to contract formats that perform substantially better under system-parameter uncertainty.

Keywords:

• supply chain contract design
• revenue sharing
• decision making under uncertain system parameters
• stackelberg game structure

Electronic supplementary material

The online version of this article (doi:10.1057/jors.2011.131) contains supplementary material, which is available to authorized users.

Supplementary Information accompanies the paper on Journal of Operational Research Society website (http://www.palgrave-journals.com/jors/)

Electronic supplementary material

The online version of this article (doi:10.1057/jors.2011.131) contains supplementary material, which is available to authorized users.

Supplementary Information accompanies the paper on Journal of Operational Research Society website (http://www.palgrave-journals.com/jors/)

Acknowledgements

This research was partially supported by the Hong Kong HKRGC Grants #746208/#9041458 and by the China NSFC Grant #71090401/71090400.