Don't ask, don't tell: Sharing revenues with a dishonest retailer

When different supply chain parties have private information, some form of information sharing is required to improve supply chain performance. However, it might be difficult to ensure truthful information transfer when firms can benefit from distorting their private information. To investigate the impact of dishonest information transfer, we consider a single-supplier single-retailer supply chain that operates under a contract with a revenue sharing clause, providing the retailer incentive to underreport sales revenues. In practice, suppliers utilize audits based on statistical tools that, for example, compare the retailers’ sales reports and order quantities to limit, but not necessarily eliminate, cheating. We investigate the impact of such limited cheating on the different supply chain constituents. We show that when the retailer can exert sales effort, a supplier might benefit from the retailer's dishonesty. Our findings also suggest that if the retailer's negotiation power is high or if retailer effort is effective, the supplier should reduce the retailer's revenue share and absorb some of the demand risk to increase retailer participation. When facing a less powerful or less capable retailer, the supplier might be better off extracting profitability upfront through a higher wholesale price.