Analysis of a revenue-sharing contract in supply chain management

We consider a supply chain involving one supplier and one retailer in which a revenue-sharing contract is adopted. Under this contract, the retailer can obtain the product from the supplier at a discounted price. As a compensation, the retailer must share his revenue with the supplier at a certain revenue-sharing rate, say r (0≤r≤1), where r represents the portion of the revenue to be kept by the retailer. Our ultimate objective is to help the whole supply chain be more profitable while upholding the individual components' incentives. We use a two-stage (Stackelberg) game to model the problem, where one player is the game's leader and the other the game's follower. Our analysis reveals that for the supply chain to be more profitable, the party that keeps more than half the revenue should serve as the leader of the Stackelberg game.