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IMA Journal of Management Mathematics Advance Access published online on February 2, 2007
IMA Journal of Management Mathematics, doi:10.1093/imaman/dpm001
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© The authors 2007. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.

Towards integration: a revenue-sharing contract in a supply chain

Zhaoqiong Qin{dagger}

Department of Management, Marketing, Strategy and Operations, Embry-Riddle Aeronautical University, Daytona Beach, FL 32114, USA

{dagger} Email: zhaoqiong.qin{at}erau.edu

Received on 31 May 2006. Accepted on 11 December 2006.


  Abstract

This paper deals with the problem of a revenue-sharing contract adopted in a supply chain involving one supplier and one retailer with short life-cycle products. Under this contract, the retailer can obtain the product from the supplier at a discounted price while as a compensation, the retailer must share his revenue with the supplier at a certain revenue-sharing rate, say r (0 ≤ r ≤ 1), where r represents the portion of the revenue to be kept by the retailer. We use a two-stage (Stackelberg) game to model the problem, where one player is the game's leader and the other the game's follower. Our ultimate objective is to maximize the overall supply chain's total profit, and to show the effects of salvage revenue and the revenue-sharing rate on transfer cost rate, profit of the supplier and retailer and the overall supply chain's total profit while upholding the individual components’ incentives. Our analysis exhibits that the case in which salvage revenue is not shared is preferred and the computational results to explore the effects of the revenue-sharing rate lead to many managerial insights regarding the leader of the game.

Keywords: supply chain; revenue-sharing contract; Stackelberg game


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