Coordination in a distribution channel with decisions on the nature of incentives and share-dependency on pricing

We research the most suitable coordination mechanism for a distribution channel that is composed of one manufacturer and one retailer. Coordination is sought through a Revenue Sharing Contract (RSC) and the channel members have four coordination options in the menu: The share of revenues can be either set during the course of the game (endogenous) or preset before the game starts (exogenous); similarly, the retail price can be either share-dependent or share-independent. We seek to identify the coordination mechanism that leads to a profit-Pareto-improving situation with respect to a non-coordinated channel that implements a wholesale price contract. We compare players’ profits in the four coordination options and identify the mechanisms that firms prefer. Compared to the non-coordinated channel, our findings suggest that the manufacturer is always economically better-off through coordination, independent of the mechanism the channel uses. In contrast, the retailer is better-off with a share-dependent-pricing mechanism with the share set ex-post. The adoption of a preset share is conditionally beneficial to the parameter fraction. The economic value loss due to the double marginalization cannot be entirely eliminated, independent of the nature (exogenous or endogenous) of the sharing parameter and on the effect of RSC on pricing. In the comparison among coordination mechanisms, only a share-dependent-pricing mechanism with the share fixed over the course of the game is profit-Pareto-improving.