Revenue Sharing and Information Leakage in a Supply Chain

69 Pages Posted: 3 Apr 2012  

Guangwen Kong

University of Minnesota - Industrial & System Engineering

Sampath Rajagopalan

University of Southern California - Marshall School of Business

Hao Zhang

UBC Sauder School of Business

Date Written: April 3, 2012

Abstract

This work explores the potential of revenue sharing contracts to facilitate information sharing in a supply chain and mitigate the negative effects of information leakage. We consider a supplier who offers a revenue sharing contract to two competing retailers, one of whom has private information about uncertain market potential and orders first. This order information may be leaked to the uninformed retailer by the supplier to realize higher profits. We show that the incentives of the supplier and retailers are better aligned under a revenue-sharing contract unlike in a wholesale price contract, reducing the supplier's incentive to leak. This is true for a wide range of wholesale prices and revenue share percentages and is more likely when the revenue share percentage is higher and when variation in demand is greater. Preventing information leakage may result in higher profits not only for the informed retailer and supplier, but surprisingly even the uninformed retailer. Our results are robust when the model is generalized along various dimensions.

Keywords: Information Sharing, Information Leakage, Revenue Sharing, Signaling Game, Information Asymmetry

Suggested Citation

Kong, Guangwen and Rajagopalan, Sampath and Zhang, Hao, Revenue Sharing and Information Leakage in a Supply Chain (April 3, 2012). Marshall School of Business Working Paper No. IOM 6-12 . Available at SSRN: https://ssrn.com/abstract=2033619 or http://dx.doi.org/10.2139/ssrn.2033619

Guangwen Kong (Contact Author)

University of Minnesota - Industrial & System Engineering ( email )

111 Church Street S.E.
Minneapolis, MN 55455
United States

Sampath Rajagopalan

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Hao Zhang

UBC Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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