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

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. Journal of the Operational Research Society advance online publication, 14 March 2012 doi:10.1057/jors.2011.131