Channel coordination through subsidy contract design in the mobile phone industry

This paper examines the feasibility of employing subsidy contracts as a control mechanism to optimise the mobile phone sales channel. We investigate a dual‐channel that consists of a telecommunication service operator (TSO) and a mobile phone manufacturer (MPM). The MPM's optimal production quantity and optimal retail price and the TSO's optimal service capacity and optimal service price are derived in both the decentralised and centralised MPSC models. The modelling results show that the coordinated MPSC leads to profit increase for the MPSC as a whole. More importantly, our analysis demonstrates that a properly designed subsidy contract can achieve the channel coordination in the MPSC. However, such channel coordination through subsidy contract is subject to certain conditions in which Pareto improvement can be achieved.