Contracts choice in retailer-led supply chain

Abstract

This paper considers a two-stage supply chain with one manufacturer and one retailer for short life-cycle products in a risk-neutral setting. Retailer’s demand depends on the product’s price and initial stock levels displayed at the store. The manufacturer’s capacity limits the order quantity. An unbiased player determines the optimal price and quantity for the centralized supply chain. Then, a retailer-led Stackelberg game is employed with four decentralized settings, namely wholesale-price, markdown, revenue-sharing, and buyback contracts. Numerical results for different contract forms show that the markdown policy yields the highest expected profit for the retailer, over the range of stock and price sensitivity levels. Sensitivity analysis shows that the markdown policy and revenue-sharing contracts favor the retailer’s profits. In contrast, the buyback and wholesale-price contracts favor the manufacturer. Also, the revenue-sharing contract results in the highest selling price and the buyback contract with the lowest selling price.