The implications of joint adoption of revenue sharing and advance booking discount programs

Consider a supply chain that consists of a supplier and a retailer, who sells a single product to the customers over a short selling season. In this paper, we present a model in which the supply chain partners participate in two different programs: (1) the supplier and the retailer enter a revenue sharing (RS) contract and (2) the retailer offers an advance booking discount (ABD) program to the customers. Under the RS scheme, the retailer shares a portion of the selling price to the supplier in return for a lower wholesale price. The ABD program is intended to use price discount to entice customers to pre-commit their orders. Besides demand increases, the ABD program allows the retailer to use the pre-committed orders to develop more accurate forecasts. By examining our model, we determine the optimal decisions associated with these two programs including the optimal price discount, optimal order quantity. We analyse the optimal expected channel profit associated with the four possible scenarios wherein each program is offered or not. We also provide a detailed numerical example to illustrate the conditions under which the benefit of the joint adoption of RS and ABD programs is higher than the sum of the benefits associated with separate adoptions of these two programs.