Supply quality management with optimal wholesale price and revenue sharing contracts: A two-stage game approach

One of the main priorities of companies involved in supply chains is improving the quality of their products. However, as in other parts of supply chain management, decentralized decision-making in supply quality management is prevalent, which causes inefficiencies such as the well-known double marginalization phenomenon. Coordinating schemes, such as the revenue sharing contract, can contribute to mitigating this phenomenon. In this paper, we investigate the potential coordinating power of the revenue sharing contract in a supply chain with one manufacturer and one supplier that collaborate to improve the design quality of a particular finished product. We set the cooperative outcome as a benchmark and compare the efficiency of an optimal revenue sharing contract with an optimal wholesale price contract in improving design quality in the setup of a non-cooperative two-stage game.