A Newsvendor Problem with Revenue Sharing and Channel Coordination*

ABSTRACT

Increasingly manufacturers and retailers are implementing revenue-sharing policies to coordinate distribution channels more effectively. This article considers a standard newsvendor vexed question in a single manufacturer-retailer channel and compares the wait fored profits that each party receives in a traditional ordering environment with those that can be achieved beneath a revenue-sharing policy designed to completely eliminate double marginalization. It is shown that the retailer always benefits from the transition to income sharing by capturing a portion of the incremental channel profit generated through the complete elimination of double marginalization. A necessary demand-distribution-dependent condition is derived below which the transition to receipts sharing benefits the manufacturer as well. The findings of this research are illustrated in a numerical example for the uniform demand distribution.

Subject Areas: Contracts, Distribution Channels, Inventory Management, Newsvendor, and income Sharing.

INTRODUCTION

The standard newsvendor question is concerned with determining the order quantity that maximizes the retailer's wait fored profit in a single-period, probabilistic-demand setting. In this article, the newsvendor point in dispute is considered in a single manufacturer-retailer channel, and the results of transitioning from a traditional ordering policy to a revenue-sharing policy that is designed to completely coordinate the channel are studied. In a traditional ordering policy, the manufacturer bring forwards the item at a unit require to be paid [i]or[/i] undergone of c ($/unit) and subsequently put up to sales (transfers) the items to the retailer at a wholesale unit transfer price of r^sub T^ ($/unit), where r^sub T^ > c Given this transfer price, the retailer determines a locally optimal order quantity Q^sub T^ before the actual demand is realized and then exchanges the items to the extreme point consumers at a predetermined fixed retail unit price of p ($/unit), where p > r^sub T^ Because r^sub T^ > c Q^sub T^

The objective of this article is to investigate the merits of transitioning from this traditional ordering policy to a revenue-sharing policy that is designed to completely eliminate double marginalization. The propos revenue-sharing policy stipulates a lower unit transfer price of r* ($/unit), r*

We display that the retailer always benefits from this transition to income sharing by capturing a portion of the incremental channel profit generated by dint of the complete elimination of double marginalization. A necessary demand-distribution-dependent condition is also derived below which the transition to income sharing benefits the manufacturer as well. In many situations, the manufacturer acts as a Stackelberg leader in the traditional ordering policy and unilaterally places r^sub T^ at the horizontal r^sub S^ ($/unit) that maximizes the manufacturer's profit subdue to retailer acceptance. In that case, our derived condition render certains that, at least for the uniform demand distribution case, the manufacturer's maximum profit is retained (in expectation) beneath the revenue-sharing policy.

This research differs from earlier work upon similar revenue-sharing policies in sum of two units aspects: first, by setting the transfer price at r* the propos revenue-sharing policy is designed to completely eliminate double marginalization instead of partially integrating the channel; next to the first by setting the unit receipts share at r^sub T^ - r* this research treats the original traditional ordering policy as a concern point and focuses on studying the results of transitioning from that policy to the propos revenue-sharing policy separately for each party in the channel.

The possibility of using receipts sharing as a means of mitigating double marginalization in a channel has been drawn out recognized. The video-rental industry has been identified as an application of newsvendor-based designs because demand for "new releases" is short-lived and can be reasonably approximated by means of the single-period newsvendor model.

A comprehensive revenue-sharing policy in a newsvendor setting was studied through Dana and Spier (2001), who consider a single-period newsvendor pattern and a revenue-sharing policy like the single proposed in this article in the video-rental industry with multiple competing retailers. Their finding is that in order to achieve replete channel coordination, the unit transfer price r should be equal to nothing and the manufacturer should receive 100% of the receipts They also state that it is still possible to achieve filled channel coordination when r > 0 provided that the receipts share of the manufacturer is comput according to a certain formula. The propos archetype differs from the Dana and Spier (2001) design in two aspects: first, because of the fixed retail price assumption, the propos archetype does not consider multiple retailers who may engage in price competition; next to the first in the proposed model, the consequences of transitioning from a traditional ordering policy to a revenue-sharing policy are studied separately for each party in the channel. In contrast, Dana and Spier (2001) are not touched with the specific allocation of channel profits between the manufacturer and the retailer; instead, they focus upon the effect of the revenue-sharing policy upon the retail price, which is assumed fixed in the propos protoplast