The Impact of Revenue Sharing Contracts on a Retailer´s Shelf-Space and Pricing Decisions

It is well known that retailers can often increase product sales by offering a price discount or allocating more shelf or display space. The retailer´s shelf-space and pricing decisions affect not only the retailer´s profitability but also the manufacturer´s profitability. This research studies how a manufacturer can use revenue sharing contracts to influence the retailer´s shelf-space and pricing decisions. We model a two-echelon supply chain with a manufacturer supplying a certain product to a retailer facing demand that depends on both the price of the product and the shelf space allocated. Under a wholesale-price-only contract, the retailer´s shelf-space allocation and pricing decisions and their impact on the manufacturer´s decision and the supply chain efficiency are addressed as a benchmark. We then consider the case where the manufacturer replenishes the retailer´s shelf under a revenue sharing contract. It is shown that a properly designed revenue sharing contract can increase the profit of the manufacture, comparing to the benchmark case. We further explore whether such a supply contract can coordinate the supply chain.