A coordinating contract for transshipment in a two-company supply chain

We study a supply chain with two independent companies producing an identical product and cooperating through transshipment. Previous studies of this chain show that only under certain conditions, linear transshipment prices could be found that induce the companies to choose the first best production quantities. Moreover, even if such transshipment prices do exist, they result in a unique division of total expected profit and thus they cannot accommodate arbitrary divisions of the profit. Using the Generalized Nash Bargaining Solution, we derive coordinating transshipment prices that always give rise to a coordinating contract for the chain. This contract relies on an implicit pricing mechanism.