IDEAS home Printed from https://ideas.repec.org/p/ecm/wc2000/1511.html
   My bibliography  Save this paper

Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms

Author

Listed:
  • James D. Dana

    (Northwestern University)

  • Kathryn Spier

    (Northwestern University)

Abstract

This paper argues that revenue sharing is a valuable instrument in vertically separated industries when there is intrabrand competition among the downstream firms, demand is stochastic or variable, and downstream inventory is chosen before demand is realized. In these environments, the upstream firm would like to simultaneously soften downstream competition and encourage efficient inventory holding. Traditional two-part tariffs cannot achieve both objectives in the presence of downstream competition. Raising the price of the inputs softens price competition but distorts the downstream firms' inventory decisions. We argue that revenue sharing, combined with a low input price, aligns the incentives in the vertical chain. The use of revenue sharing in video rental retailing is discussed. Blockbuster in particular has used revenue sharing in conjunction with heavy marketing of availability to grow significantly in the video rental retail industry. Many other outlets use revenue sharing as well. Some antitrust concerns have been raised by smaller firms suggesting that revenue sharing might be an anticompetitive vertical restraint. Although our model does not address retailer market power, we show that revenue sharing contracts can be used by upstream firms increase inventory holding and consumer welfare.

Suggested Citation

  • James D. Dana & Kathryn Spier, 2000. "Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms," Econometric Society World Congress 2000 Contributed Papers 1511, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1511
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/RePEc/es2000/1511.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
    2. Deneckere, Raymond & Marvel, Howard P & Peck, James, 1997. "Demand Uncertainty and Price Maintenance: Markdowns as Destructive Competition," American Economic Review, American Economic Association, vol. 87(4), pages 619-641, September.
    3. Butz, David A, 1997. "Vertical Price Controls with Uncertain Demand," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 433-459, October.
    4. Kandel, Eugene, 1996. "The Right to Return," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 329-356, April.
    5. Oliver Hart & Jean Tirole, 1990. "Vertical Integration and Market Foreclosure," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 205-286.
    6. Warren-Boulton, Frederick R, 1974. "Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 783-802, July/Aug..
    7. Raymond Deneckere & Howard P. Marvel & James Peck, 1996. "Demand Uncertainty, Inventories, and Resale Price Maintenance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 885-913.
    8. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    9. Dana, James D, Jr & Spier, Kathryn E, 1993. "Expertise and Contingent Fees: The Role of Asymmetric Information in Attorney Compensation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 349-367, October.
    10. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
    11. Barry Alan Pasternack, 1985. "Optimal Pricing and Return Policies for Perishable Commodities," Marketing Science, INFORMS, vol. 4(2), pages 166-176.
    12. Prescott, Edward C, 1975. "Efficiency of the Natural Rate," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1229-1236, December.
    13. Marvel, Howard P & Peck, James, 1995. "Demand Uncertainty and Returns Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 691-714, August.
    14. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-587, September.
    15. Shapiro, Carl, 1985. "Patent Licensing and R&D Rivalry," American Economic Review, American Economic Association, vol. 75(2), pages 25-30, May.
    16. Mallela, Parthasaradhi & Nahata, Babu, 1980. "Theory of Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1009-1025, October.
    17. V. Padmanabhan & I. P. L. Png, 1997. "Manufacturer's Return Policies and Retail Competition," Marketing Science, INFORMS, vol. 16(1), pages 81-94.
    18. Warren-Boulton, Frederick R, 1977. "Vertical Control by Labor Unions," American Economic Review, American Economic Association, vol. 67(3), pages 309-322, June.
    19. Alexander, Cindy R & Reiffen, David, 1995. "Vertical Contracts as Strategic Commitments: How Are They Enforced?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 623-649, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hal R. Varian, 2001. "High-technology industries and market structure," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 65-101.
    2. Ioannis Ioannou & Julie Holland Mortimer & Richard Mortimer, 2011. "The Effects Of Capacity On Sales Under Alternative Vertical Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(1), pages 117-154, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Subhajyoti Bandyopadhyay & Anand A. Paul, 2010. "Equilibrium Returns Policies in the Presence of Supplier Competition," Marketing Science, INFORMS, vol. 29(5), pages 846-857, 09-10.
    2. Fernando Bernstein & Awi Federgruen, 2005. "Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty," Management Science, INFORMS, vol. 51(1), pages 18-29, January.
    3. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    4. Shailender Singh & Chen Guan-Ru, 2020. "Modeling variations in price inertia under demand uncertainty," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(1), pages 26-42, February.
    5. João Montez, 2015. "Controlling opportunism in vertical contracting when production precedes sales," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 650-670, September.
    6. Yong Liu & Michael J. Fry & Amitabh S. Raturi, 2006. "Vertically restrictive pricing in supply chains with price‐dependent demand," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(6), pages 485-501, September.
    7. Charles E. Hyde, 2001. "What Motivates Returns Policies?," Department of Economics - Working Papers Series 821, The University of Melbourne.
    8. Marvel, Howard P. & Wang, Hao, 2009. "Distribution contracts to support optimal inventory holdings under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 625-631, September.
    9. Daniel Granot & Shuya Yin, 2005. "On the effectiveness of returns policies in the price‐dependent newsvendor model," Naval Research Logistics (NRL), John Wiley & Sons, vol. 52(8), pages 765-779, December.
    10. Zhao, Yingxue & Choi, Tsan-Ming & Cheng, T.C.E. & Sethi, Suresh P. & Wang, Shouyang, 2014. "Buyback contracts with price-dependent demands: Effects of demand uncertainty," European Journal of Operational Research, Elsevier, vol. 239(3), pages 663-673.
    11. V. Padmanabhan & I.P.L. Png, 2004. "Returns Policies and Retail Price Competition," Industrial Organization 0401007, University Library of Munich, Germany.
    12. Yuyue Song & Saibal Ray & Shanling Li, 2008. "Structural Properties of Buyback Contracts for Price-Setting Newsvendors," Manufacturing & Service Operations Management, INFORMS, vol. 10(1), pages 1-18, November.
    13. Anna G. Devlin & Wedad Elmaghraby & Rebecca W. Hamilton, 2018. "Why do suppliers choose wholesale price contracts? End-of-season payments disincentivize retailer marketing effort," Journal of the Academy of Marketing Science, Springer, vol. 46(2), pages 212-233, March.
    14. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    15. Ohmura, Shota & Matsuo, Hirofumi, 2016. "The effect of risk aversion on distribution channel contracts: Implications for return policies," International Journal of Production Economics, Elsevier, vol. 176(C), pages 29-40.
    16. Gurnani, Haresh & Sharma, Arun & Grewal, Dhruv, 2010. "Optimal Returns Policy under Demand Uncertainty," Journal of Retailing, Elsevier, vol. 86(2), pages 137-147.
    17. Scott Webster & Z. Kevin Weng, 2000. "A Risk-free Perishable Item Returns Policy," Manufacturing & Service Operations Management, INFORMS, vol. 2(1), pages 100-106, July.
    18. Mehmet Gümüş & Saibal Ray & Shuya Yin, 2013. "Returns Policies Between Channel Partners for Durable Products," Marketing Science, INFORMS, vol. 32(4), pages 622-643, July.
    19. V. Padmanabhan & I. P. L. Png, 2004. "Reply to “Do Returns Policies Intensify Retail Competition?”," Marketing Science, INFORMS, vol. 23(4), pages 614-618, January.
    20. Jeong, In-Jae, 2012. "A centralized/decentralized design of a full return contract for a risk-free manufacturer and a risk-neutral retailer under partial information sharing," International Journal of Production Economics, Elsevier, vol. 136(1), pages 110-115.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1511. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.