Consignment Contracts with Revenue Sharing for a Capacitated Retailer and Multiple Manufacturers

Yun Fong Lim (), Yunzeng Wang () and Yue Wu ()
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Yun Fong Lim: Lee Kong Chian School of Business, Singapore Management University, Singapore 178899
Yunzeng Wang: School of Business Administration, University of California, Riverside, Riverside, California 92521
Yue Wu: INSEAD, Singapore 138676

Manufacturing & Service Operations Management, 2015, vol. 17, issue 4, 527-537

Abstract: We consider a retailer with limited storage capacity selling n independent products. Each product is produced by a distinct manufacturer, who is offered a consignment contract with revenue sharing by the retailer. The retailer first sets a common revenue share for all products, and each manufacturer then determines the retail price and production quantity for his product. Under certain conditions on price elasticities and cost fractions, we find a unique optimal revenue share for all products. Surprisingly, it is optimal for the retailer not to charge any storage fee in many situations even if she is allowed to do so. Both the retailer’s and manufacturers’ profits first increase and then remain constant as the capacity increases, which implies that an optimal capacity exists. We also find that the decentralized system requires no larger storage space than the centralized system at the expense of channel profit. If products are complementary, as the degree of complementarity increases, the retailer will decrease her revenue share to encourage the manufacturers to lower their prices.

Keywords: incentives and contracting; supply chain management; capacity planning and investment; game theory; retailing (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (13)

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