Implications of Contract-Bargaining Mechanisms for Coordination and Profit Sharing in a Distribution Channel

Abstract

The present work models a three-level distribution channel that has a manufacturer, multiple distributors, and multiple retailers under each distributor to analyze channel members’ cooperative, semicooperative, and noncooperative decisions for an arbitrary replenishment cycle other than the first in the infinite time horizon. It uses two sequential bargaining processes: forward contract-bargaining (FCB) and backward contract-bargaining (BCB) to eliminate channel conflict and allocate additional profit among channel members. We successfully implement a hybrid contract mechanism that combines wholesale price discount (WPD) and subsidy on holding cost for channel coordination. The concept of Nash bargaining is applied for additional profit sharing. The proposed hybrid contract can fully coordinate the tree-like supply chain and enrich the entire profit of the supply chain at its best. The manufacturer provides WPD to each distributor separately, and each distributor provides a subsidy to each of its retailers independently. Both the sequential bargaining processes are designed in such a way that an upstream channel member always has the opportunity to account for different reservations for its different downstream members. Although each bargaining process eliminates the channel conflict, finds win-win ranges, and distributes surplus profit, the distributors prefer BCB, whereas the manufacturer and the retailers prefer the FCB. Also, without receiving WPD, the distributors have the ability to coordinate the supply chain and find win-win profits by subsidizing the retailers’ holding costs. A numerical case is presented to explain the findings of the work.