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Channel Performance Under Consignment Contract with Revenue Sharing

Author

Listed:
  • Yunzeng Wang

    (Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44120)

  • Li Jiang

    (University of Michigan Business School, Ann Arbor, Michigan 48109)

  • Zuo-Jun Shen

    (Department of Industrial and Systems Engineering, University of Florida, Gainesville, Florida 32611)

Abstract

Under a consignment contract with revenue sharing, a supplier decides on the retail price and delivery quantity for his product, and retains ownership of the goods; for each item sold, the retailer deducts a percentage from the selling price and remits the balance to the supplier. In this paper we show that, under such a contract, both the overall channel performance and the performance of individual firms depend critically on demand price elasticity and on the retailer's share of channel cost. In particular, the (expected) channel profit loss, compared with that of a centralized system, increases with demand price elasticity and decreases with retailer's cost share, while the profit share extracted by the retailer decreases with price elasticity and increases with retailer's cost share. With an iso-price-elastic demand model, we show that the channel profit loss cannot exceed 26.4%, and that the retailer's profit share cannot be below 50%. When price elasticity is low, or when the retailer's cost share approaches 100%, or both, the retailer can extract nearly all the channel profit that is almost equal to the centralized channel profit.

Suggested Citation

  • Yunzeng Wang & Li Jiang & Zuo-Jun Shen, 2004. "Channel Performance Under Consignment Contract with Revenue Sharing," Management Science, INFORMS, vol. 50(1), pages 34-47, January.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:1:p:34-47
    DOI: 10.1287/mnsc.1030.0168
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    References listed on IDEAS

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