Revenue sharing contract with two-way penalties

In the last few years, the benefits of revenue‐sharing mechanisms in supply chain coordination have attracted many practitioners and academia. However, application of penalty clause in revenue sharing contract has received less attention in the existing research works. In this research, a revenue sharing contract under the effects of two‐way penalties is examined. In our model, the retailer will reserve a commitment level in advance and the manufacturer will then determine the allocated quantity which is the maximum supply quantity so as to maximise his own profit. It is found that due to asymmetric information in the examined supply chain, the manufacturer can find the best decision for his allocated quantity while the decision of the retailer on commitment level may not be optimal. The circumstances under which the manufacturer may be willing to share information about allocated quantity with the retailer to help reach the optimal decisions for both parties are also examined.