Service-Cost-Sharing Contract Design for a Dual-Channel Supply Chain with Free Riding

Abstract

This paper considers a dual channel supply chain, where a manufacturer sells a single product through his/her online channel and a traditional retailer, who provides consumers with pre-sale services. The manufacturer’s online channel may free-ride the retailer’s pre-sale service, which reduces the retailer’s desired effort level, and hence may hurt the manufacturer’s and the overall supply chain performance. Under both Manufacturer- and Retailer-Stackelberg settings, we study how the manufacturer designs a service-cost-sharing (SCS for brevity) contract to enhance the retailer’s service effort level, and how free riding influences two members’ optimal decisions. We design an algorithm for determining the two members’ optimal decisions under each setting. The three main findings are found: (i) In the Manufacturer-Stackelberg setting, the SCS contract can enhance the retailer’s service effort level and eliminate the negative impact incurred by free riding, but can’t in the Retailer-Stackelberg setting. (ii) Under the SCS contract, the smaller the fraction of service cost the retailer is requested to share, the more detrimental to the retailer it will be under certain conditions. That is, the phenomenon called “counter-profit cost-sharing” appears. (iii) Both players like to act as a leader if the price competition between the two channels is not relatively very fierce, otherwise they both like to act as a follower.

Keywords

Free riding / pricing strategy / service cost-sharing contract / stackelberg game / channel conflict

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