Coordination with Supply Chain Contracts in the Presence of Two Different Consumer Segments

Abstract

This paper models a supply chain of a manufacturer, a retailer and two different consumer segments. One segment has a high willingness-to-pay and the other a low willingness-to-pay. The manufacturer decides on the wholesale price and the selling price is determined by the retailer. It is well known that a straightforward wholesale price contract does not coordinate the channel. In this paper we show that two other types of contracts, namely the revenue sharing and the profit sharing mechanisms do coordinate the supply chain and, furthermore, provide win-win for the entire range of parameter values. Our analysis has also established an equivalence relationship between the revenue and the profit sharing mechanisms. It is also shown that the pull discount mechanism (that is: the manufacturer provides a discount directly to the end consumers) coordinates for a greater range of parameter values compared to the wholesale price discount but not for the entire possible range.

Moreover, for the situation where the manufacturer designs the targeted push-pull discount (Manufacturer provides a wholesale price discount to the retailer and a pull discounts which can be availed only by the low willingness to pay consumers) it is shown that it is possible for the channel to make a greater profit by extracting surplus from the high willingness-to-pay customers. However, "targeted push-pull" is feasible only with certain restrictions. Interestingly, we found that the revenue sharing or the profit sharing mechanisms with the targeted pull discount is feasible when the "targeted push-pull" fails to coordinate. Even, in this case the performance of the targeted pull discount in combination with the revenue or profit sharing mechanisms is equivalent.

Keywords: Pull discounts, Push discounts, Contract mechanisms, Channel coordination & win-win