Coordinating a Seller-Buyer Supply Chain with a Proper Allocation of Chain’s Surplus Profit Using a General Side-Payment Contract

In this paper, seller-buyer supply chain coordination with general side-payment contracts is introduced to gain the maximum possible chain profit. In our model, the logistics costs for both buyer and seller are considered and the final demand is also supposed to be a decreasing function of the retail price. Since parties aim to maximize their individual profits, the contractual parameters are set in a way that these decisions become aligned with system optimal decisions. Therefore, a side payment contract is suggested in our model to assign the chain surplus profit to the chain members such that they have no intention to leave the coalition. Then, we change the contract into a quantity discount-like contract which makes the contract much easier to be implemented in a real situation. The model will also be extended to include two buyers and a single seller. Finally, by numerical analysis, we show that by using this kind of contract, a significant improvement in the chain members’ profits and the total chain revenue will be achieved.