Using Contract Mechanisms to Coordinate Product Line Decisions

39 Pages Posted: 19 Feb 2008

See all articles by Vijayender Reddy Nalla

Vijayender Reddy Nalla

Nyenrode University

Venu Venugopal

Nyenrode University

Jack A.A. van der Veen

Nyenrode Business Universiteit

Date Written: February 2008

Abstract

In this paper we design contract mechanisms to increase the efficiency of product line decisions in a Supply Chain (SC). A two stage SC with a buyer and the supplier is considered. The end consumers are comprised of two segments with different willingness to pay. The final demand and the segments' willingness to pay are assumed to be deterministic. Two different settings are analyzed: A generalized setting where the end consumer's willingness to pay is proportional to the quality of the product and the second is a specialized case where the consumer's willingness to pay is independent of the quality of the product. It is demonstrated that in both the settings a decentralized SC stocks less number of product variants when compared to centralized SC. Marketing literature suggests that the so-called "slotting allowance" is a mechanism to increase the efficiency of product line decisions. However, the literature on slotting allowance does not address the issue of coordination and win-win. In this paper we discuss the revenue and profit sharing mechanisms. It is shown that not only these mechanisms coordinate the SC but that they also provide win-win to both players.

Keywords: Product line decisions, Contract mechanisms, Channel coordination, win-win

JEL Classification: R30

Suggested Citation

Nalla, Vijayender Reddy and Venugopal, Venu and van der Veen, Jack A.A., Using Contract Mechanisms to Coordinate Product Line Decisions (February 2008). Available at SSRN: https://ssrn.com/abstract=1094770 or http://dx.doi.org/10.2139/ssrn.1094770

Vijayender Reddy Nalla (Contact Author)

Nyenrode University ( email )

3621 BG Breukelen
Netherlands

Venu Venugopal

Nyenrode University ( email )

3621 BG Breukelen
Netherlands

Jack A.A. Van der Veen

Nyenrode Business Universiteit ( email )

PO Box 130
3621 AC Breukelen
Netherlands

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