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Coordination via cost and revenue sharing in manufacturer–retailer channels

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  • Kunter, Marcus

Abstract

The problem of establishing efficiency in a manufacturer–retailer channel (channel coordination) is extensively discussed in the industrial economics, the marketing and the operations research literature. However, studies considering consumer demand to be simultaneously affected by price and non-price variables are scarce. One subset of models investigates efficient contracts with non-linear tariffs, but requires mechanisms which are rarely observed in managerial practice. The other subset analyses channel efficiency effects of alternative royalty payments, but omits to design an efficient contract. We contribute to this literature by investigating a contract of royalty payments that is sufficient for channel coordination. Based on the analysis of the underlying vertical externalities, we show that channel coordination requires cost and revenue sharing via a revenue sharing rate and marketing effort participation rates on both manufacturer and retailer level. Some surprising findings are highlighted: there exists a continuum of efficient contracts. Efficiency requires a retailer’s participation of at least 50% in the manufacturer’s cost of marketing effort. Moreover, the elimination of double marginalisation is not necessary for channel coordination. Manufacturer and retailer can choose an efficient contract via bargaining over the wholesale price. The main challenge for managers will be to create acceptance of new types of royalty payments based on a trustful manufacturer–retailer relationship. We also discuss the cases of the Apple iPhone market launch and of innovative restaurant franchising to further illustrate and underline the relevance of our results.

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  • Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
  • Handle: RePEc:eee:ejores:v:216:y:2012:i:2:p:477-486
    DOI: 10.1016/j.ejor.2011.07.001
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    3. Karray, Salma, 2015. "Cooperative promotions in the distribution channel," Omega, Elsevier, vol. 51(C), pages 49-58.
    4. Becker-Peth, Michael & Thonemann, Ulrich W., 2016. "Reference points in revenue sharing contracts—How to design optimal supply chain contracts," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1033-1049.
    5. Lee, Shine-Der & Fu, Yen-Chen, 2014. "Joint production and delivery lot sizing for a make-to-order producer–buyer supply chain with transportation cost," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 66(C), pages 23-35.
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    11. Giri, B.C. & Sharma, S., 2014. "Manufacturer's pricing strategy in a two-level supply chain with competing retailers and advertising cost dependent demand," Economic Modelling, Elsevier, vol. 38(C), pages 102-111.
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    15. Saha, S. & Goyal, S.K., 2015. "Supply chain coordination contracts with inventory level and retail price dependent demand," International Journal of Production Economics, Elsevier, vol. 161(C), pages 140-152.
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