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Price-Dependent Profit Sharing as a Channel Coordination Device

Author

Listed:
  • Øystein Foros

    (Norwegian School of Economics and Business Administration, NO-5045 Bergen, Norway)

  • Kåre P. Hagen

    (Norwegian School of Economics and Business Administration, NO-5045 Bergen, Norway)

  • Hans Jarle Kind

    (Norwegian School of Economics and Business Administration, NO-5045 Bergen, Norway)

Abstract

We show how an upstream firm, by using a price-dependent profit-sharing rule, can prevent destructive competition between downstream firms that produce relatively close substitutes. With this rule, the upstream firm induces the retailers to behave as if demand has become less price elastic. As a result, competing downstream firms will maximize aggregate total channel profit. When downstream firms are better informed about demand conditions than the upstream firm, the same outcome cannot be achieved by vertical restraints such as resale price maintenance. Price-dependent profit sharing may also ensure that the downstream firms undertake efficient market expanding investments. The model is consistent with observations from the market for content commodities distributed by mobile networks.

Suggested Citation

  • Øystein Foros & Kåre P. Hagen & Hans Jarle Kind, 2009. "Price-Dependent Profit Sharing as a Channel Coordination Device," Management Science, INFORMS, vol. 55(8), pages 1280-1291, August.
    • Handle: RePEc:inm:ormnsc:v:55:y:2009:i:8:p:1280-1291
    DOI: 10.1287/mnsc.1090.1019
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    References listed on IDEAS

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    3. Choné, Philippe & Linnemer, Laurent, 2020. "Linear demand systems for differentiated goods: Overview and user’s guide," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    4. J-M Chen & H-L Cheng & I-C Lin, 2011. "On channel coordination under price-dependent revenue-sharing: can eBay's fee structure coordinate the channel?," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(11), pages 1992-2001, November.
    5. Palsule-Desai, Omkar D., 2013. "Supply chain coordination using revenue-dependent revenue sharing contracts," Omega, Elsevier, vol. 41(4), pages 780-796.
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    8. Dertwinkel-Kalt, Markus & Wey, Christian, 2021. "Multi-Product Pricing and Minimum Resale Price Maintenance," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242338, Verein für Socialpolitik / German Economic Association.
    9. Philippe Choné & Laurent Linnemer, 2019. "The quasilinear quadratic utility model: an overview," CESifo Working Paper Series 7640, CESifo.
    10. Palsule-Desai, Omkar D. & Tirupati, Devanath & Chandra, Pankaj, 2013. "Stability issues in supply chain networks: Implications for coordination mechanisms," International Journal of Production Economics, Elsevier, vol. 142(1), pages 179-193.
    11. Jen-Ming Chen & Hung-Liang Cheng, 2012. "Effect of the price-dependent revenue-sharing mechanism in a decentralized supply chain," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(2), pages 299-317, June.
    12. Øystein Foros & Hans Jarle Kind & Guttorm Schjelderup, 2012. "Ad Pricing by Multi-Channel Platforms: How to Make Viewers and Advertisers Prefer the Same Channel?," Journal of Media Economics, Taylor & Francis Journals, vol. 25(3), pages 133-146, September.
    13. Hua, Zhongsheng & Zhang, Xuemei & Xu, Xiaoyan, 2011. "Product design strategies in a manufacturer-retailer distribution channel," Omega, Elsevier, vol. 39(1), pages 23-32, January.
    14. Ata Allah Taleizadeh & Mahsa Noori-daryan & Mohammad Reza Soltani & Reza Askari, 2022. "Optimal pricing and ordering digital goods under piracy using game theory," Annals of Operations Research, Springer, vol. 315(2), pages 931-968, August.
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