Supply-Chain-Coordination-with-Revenue-Sharing-Con

SupplyChainCoordinationwithRevenue-SharingContracts:StrengthsandLimitationsAuthor(s):GérardP.CachonandMartinA.LariviereReviewedwork(s):Source:ManagementScience,Vol.51,No.1,IncentivesandCoordinationinOperationsManagement(Jan.,2005),pp.30-44Publishedby:INFORMSStableURL::30/11/201102:26YouruseoftheJSTORarchiveindicatesyouracceptanceoftheTerms&ConditionsofUse,[e-mail]thJSTORtodigitize,preserveandextendaccesstoManagementScience.@2005INFORMSSupplyChainCoordinationwithRevenue-SharingContracts:StrengthsandLimitationsG?rardP.Cach?nTheWhartonSchool,UniversityofPennsylvania,Philadelphia,Pennsylvania19104,[e-mail]Management,NorthwesternUniversity,Evanston,Illinois60208,[e-mail]-sharingcontract,aretailerpaysasupplierawholesalepriceforeachunitpurchased,plusapercentageoftherevenuetheretailergenerates.Suchcontractshavebecomemoreprevalentinthevid?ocassetterentalindustryrelativetothemoreconventionalwholesalepricecontract.Thispaperstudiesrevenue-sharingcontractsinageneralsupplychainmodelwithrevenuesdeterminedbyeachretailer'spurchasequantityandprice.Demandcanbedeterministicorstochasticandrevenueisgeneratedeitherfromrentalsoroutrightsales.Ourmodelincludesthecaseofasuppliersellingtoaclassicalfixed-pricenewsvendororapricesettingnewsvendor.Wedemonstratethatrevenuesharingcoordinatesasupplychainwithasingleretailer(i.e.,theretailerchoosesoptimalpriceandquantity)andarbitrarilyallocatesthesupplychain'sprofit.Wecomparerevenuesharingtoanumberofothersupplychaincontracts(e.g.,buy-backcontracts,price-discountcontracts,quantity-flexibilitycontracts,sales-rebatecontracts,franchisecontracts,andquantitydiscounts).Wefindthatrevenuesharingisequivalenttobuybacksinthenewsvendorcaseandequivalenttopricediscountsintheprice-settingnewsvendorcase.Revenuesharingalsocoordinatesasupplychainwithretailerscompetinginquantities,e.g.,Cournotcompetitorsorcompetingnewsvendorswithfixedprices.Despiteitsnumerousmerits,weidentifyseverallimitationsofrevenuesharingto(atleastpartially)explainwhyitisnotprevalentinallindustries.Inparticular,wecharacterizecasesinwhichrevenuesharingprovidesonlyasmallimprovementovertheadministrativelycheaperwholesalepricecontract.Additionally,revenuesharingdoesnotcoordinateasupplychainwithdemandthatdependsoncostlyretaileffort.Wedevelopavariationonrevenuesharingforthissetting.Keywords:gametheory;bargaining;newsvendor;inventorycompetition;saleseffort;CournotHistory:AcceptedbyFangruoChenandStefanosA.Zenios,specialissueeditors;receivedJune28,2000.Thispaperwaswiththeauthors14monthsfor3revisions.1.IntroductionThevid?ocassetteretailerfacesachallengingcapacityproblem.Thepeakpopularityofarentaltitlelastsonlyafewweeks,butthecostofatapehastraditionallybeenhighrelativetothepriceofarental.Inaconventionalsalesagreement,theretailerpurchaseseachtapefromhissupplierforabout$65andcollectsabout$3perrental.Hence,atapeearnsaprofitonlyafter22rentals.Becausethedemandforatapetypicallystartshighandtapersquickly,aretailercannotjustifypurchasingenoughtapestocovertheinitialpeakdemandentirely.AtBlockbusterInc.,alargevideoretailer,thepooravailabilityofnew-releasevideoswasconsistentlyamajorcustomercomplaint(McCollum1998,Shapiro1998a).Seekingasolutiontothisproblem,in1998Blockbusteragreedtopayitssuppliersaportion(probablyintherangeof30%to45%)ofitsrentalincomeinexchangeforareductionintheinitialpricepertapefrom$65to$8.*IfBlockbusterkepthalfoftherentalincome,thebreak-evenpointforatapewoulddroptoapproximatelysixrentals,therebyallowingBlockbustertopurchasemanymoretapes.TheintroductionofrevenuesharingcoincidedwithasignificantimprovementinperformanceatBlockbuster:WarrenandPeers(2002)reportthatBlockbuster'smarketshareofvideorentalsincreasedfrom24%in1997to40%in2002.Notsurprisingly,thishasledtolitigationagainstBlockbusterandthemoviestudios,allegingthatrevenue-sharingcontractshavehurtcompetitionintheindustry.Todate,thesehavebeenunsuccessful(WallStreetJournal2002).Indeed,evidenceshowsthatthenewtermsoftradehelped1Blockbuster'stermsarenotpublic.Rentrak,adistributor,offersthefollowing:Thestudiogets45%oftherevenue,Rentrak10%,andtheretailer45%().BecauseBlockbusterdealsdirectlywiththestudios,itstermsshouldbeatleastasgenerous.30Cach?nandLariviere:SupplyChainCoordinationwithRevenue-SharingContractsManagementScience51(1),pp.30-44,?2005INFORMS31theindustryinaggregate:Mortimer(2000)estimatesrevenuesharingincreasedtheindustry'stotalprofitby7%.Thispaperstudies