Analysis of a Revenue-Sharing Contract in Supply Chain Management

We consider a supply chain involving one supplier and one retailer in which a revenuesharing contract is adopted. Under this contract, the retailer can obtain the product from the supplier at a discounted price. 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. Our ultimate objective is to maximize the overall supply chain’s total profit while upholding the individual components’ incentives. 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 analysis reveals that to maximize the supply chain’s total profit, it should be that, the party who keeps more than half of the revenue should also be the leader of the Stackelberg game.