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Effect of the price-dependent revenue-sharing mechanism in a decentralized supply chain

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  • Jen-Ming Chen
  • Hung-Liang Cheng

Abstract

This paper deals with an emerging research problem of coordinating a vertically separated channel under a price-dependent revenue-sharing mechanism, which has been used in eBay’s marketplace over two decades. We develop analytic models with bearing the following questions in mind: can the channel conducted by such a mechanism operate effectively and efficiently? Can it outperform the prevalent wholesale-price-only arrangement or the price-independent revenue sharing practice? If not, does it persist in certain decision bias that leads to a lower profit and channel inefficiency? To investigate these questions, we model the decision-making of the two firms in the supply chain as a Stackelberg game and carry out equilibrium analysis. Our analysis shows that the price-dependent R-S model does not outperform the price-independent, and only performs better than the wholesale-price-only mechanism in certain conditions, e.g., a higher retail share of channel-wide cost and/or a lower price-sensitivity coefficient of R-S function. Our findings suggest that it may be unworthy of adopting such a more complicated, price-dependent mechanism from a channel coordination perspective. Copyright Springer-Verlag 2012

Suggested Citation

  • 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.
    • Handle: RePEc:spr:cejnor:v:20:y:2012:i:2:p:299-317
    DOI: 10.1007/s10100-010-0182-3
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    References listed on IDEAS

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