Equilibrium analysis and Pareto improvement of a supply chain under revenue sharing contract with consignment and slotting allowances

Revenue sharing contract with consignment is prevalent in internet commerce, video rental, vending machine, and used-book merchandising. Under such a contract, the study models the decision-making of a supply channel with one manufacturer and one retailer as a Stackelberg game. The retailer, acting as the leader, offers the manufacturer a revenue sharing contract, which specifies the percentage allocation of revenue between her and the manufacturer. The manufacturer chooses a retail price as a response. The study conducts equilibrium analysis for both the centralized and decentralized channel settings with and without cooperation. The study reveals that the profit loss due to non-cooperative decentralization is significant, and it tends to have a consistent bias that is setting higher retail price by the manufacturer and higher revenue-sharing percentage by the retailer. Notably, the loss is increasing in the price elasticity of demand and decreasing in the retailer's cost-share. In other words, the cooperative decentralization will generate more profit than that of the non-cooperative if the retailer's cost-share is small and/or the elasticity is high. In addition, a profit-sharing scheme through slotting allowance is proposed to achieve perfect coordination, which leads to Pareto improvements among channel participants.