Overcoming the drawbacks of a revenue-sharing contract through a support program

Abstract

In a marketing channel governed by goodwill dynamics, players adjust their pricing and advertising strategies when shifting from a wholesale price contract (WPC) to a revenue sharing contract (RSC). We demonstrate that this shift is not payoff-Pareto-improving when the retailer, who is the player transferring the share of revenues, is myopic. Further, we identify the conditions under which the negative effects an RSC creates may be alleviated when the manufacturer offers a support program. Finally, contrarily to operational coordination instruments such as an RSC, a support program always leads to a payoff-Pareto-improving situation and thus should be preferred by firms to reach coordination.