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.