Incentive contract design in competing distribution channels

Abstract

The service provision of the retailer has a great effect on customer satisfaction and market demand in the production distribution channel. Because the service level is the private information of the retailers in a supply chain, a key decision problem of the manufacturers is how to motivate the retailers to offer high service. This article addresses this issue under the framework of two competing distribution channels, where each channel has a single manufacture and a single retailer. We use the principal-agent theory and propose two models under both symmetric and asymmetric information. We show that external competition is a driving force to improve the service level of the retailers. The manufacturers’ profits decrease under asymmetric information in comparison with that under symmetric information. In addition, the manufacturers’ profits increase when weak competition exists among retailers under asymmetric information. We explore applications of our model and design contracts through a case study of a large consumer electronics corporation in China.

Keywords:

• incentive contract
• competitive distribution channels
• principal-agent theory
• asymmetric information

Acknowledgements

This research was supported by the Research Foundation of Nanjing University of Science & Technology Grant JGYY0603, JGQN0703, JGYY0801, Hundred-teacher Program of Nanjing University of Science & Technology and Social Science Foundation of Jiangsu Province Education Department Grant 07SJD630045.