Three revenue-sharing variants: their significant performance differences under system-parameter uncertainties

Abstract

In the widely studied revenue sharing (hereafter RS) contract format, the manufacturer of a product not only charges the retailer a unit wholesale price w, but also requires the retailer to share part of the product's revenue (ie, the unit retail price p) with him. For a product with price-dependent demand, it is well known that if a dominant manufacturer knows the system parameters deterministically, then RS gives him the perfect power of simultaneously coordinating the channel and allocating profit arbitrarily. Unfortunately, RS's power deteriorates as the manufacturer's knowledge of the system parameters becomes increasingly uncertain. This paper shows that this deterioration can be substantially reduced by using slightly modified versions of RS; these modifications roughly amount to sharing a retailer's gross profit instead of revenue. In other words, this paper presents simple modifications to the classical RS, leading to contract formats that perform substantially better under system-parameter uncertainty. © 2012 Operational Research Society Ltd. All rights reserved.