A newsvendor problem with revenue sharing and channel coordination

Increasingly manufacturers and retailers are implementing revenue-sharing policies to coordinate distribution channels more effectively. This article considers a standard newsvendor problem in a single manufacturer-retailer channel and compares the expected profits that each party receives in a traditional ordering environment with those that can be achieved under a revenue-sharing policy designed to completely eliminate double marginalization. It is shown that the retailer always benefits from the transition to revenue sharing by capturing a portion of the incremental channel profit generated by the complete elimination of double marginalization. A necessary demand-distribution-dependent condition is derived under which the transition to revenue sharing benefits the manufacturer as well. The findings of this research are illustrated in a numerical example for the uniform demand distribution.