Effect of the price‐dependent revenue‐sharing mechanism in a decentralized supply chain

This paper deals with an emerging research problem of coordinating a vertically separated channel under a price‐dependent revenue‐sharing mechanism, which has been used in eBay’s marketplace over two decades. We develop analytic models with bearing the following questions in mind: can the channel conducted by such a mechanism operate effectively and efficiently? Can it outperform the prevalent wholesale‐price‐only arrangement or the price‐independent revenue sharing practice? If not, does it persist in certain decision bias that leads to a lower profit and channel inefficiency? To investigate these questions, we model the decision‐making of the two firms in the supply chain as a Stackelberg game and carry out equilibrium analysis. Our analysis shows that the price‐dependent R‐S model does not outperform the price‐independent, and only performs better than the wholesale‐price‐only mechanism in certain conditions, e.g., a higher retail share of channel‐wide cost and/or a lower price‐sensitivity coefficient of R‐S function. Our findings suggest that it may be unworthy of adopting such a more complicated, price‐dependent mechanism from a channel coordination perspective.