Using Revenue Sharing to Achieve Channel Coordination for a Newsboy Type Inventory Model

This chapter considers a single period inventory (newsboy) problem in which a manufacturer will both sell the item to the vendor outright as well as offer the item to the vendor on a revenue sharing (consignment) basis. In the latter case, the amount of money the vendor pays per unit is less than if the item is purchased by the vendor, but the vendor must share some of the revenue with the manufacturer. The purpose of our analysis is to investigate the effect of such a strategy on the vendor’s purchasing decision and demonstrate how such a revenue sharing scheme can be used to achieve channel coordination.