Consignment contracts with cooperative programs and price discount mechanisms in a dynamic supply chain

This paper investigates whether a supply chain can achieve coordination by implementing two mechanisms: a cooperative advertising program and a price discount mechanism. We start by analyzing a consignment contract with a revenue-sharing agreement in which a manufacturer decides both the price and the quality investment while the retailer sets the store advertising efforts. The manufacturer is the brand owner and increases the goodwill through quality and pricing. We solve three dynamic games, in which the manufacturer is the Stackelberg leader, and compare the related solutions. We discover that the manufacturer, as chain leader, will always propose the adoption of a coordination mechanism. When the manufacturer opts for a cooperative program, the retailer is always economically better off; thus, a cooperative program is always profit-Pareto-improving. When the manufacturer opts for a price discount mechanism, the retailer is always economically worse-off because the discount applies only to her margins. Nevertheless, the price discount mechanism is profit-Pareto-improving in the case of high production cost: The price discount allows for considerably reducing the retail price, which translates to a substantial increase in demand. In all other cases, the retailer sets zero price discount, thus preferring a non-coordinated framework.