Two-part tariff contract design for a supplier base: a unifying methodology

Abstract Conventional contract designs largely aim to coordinate decisions in dyadic relationships. In the new era of network environments and near-zero variable costs for many goods and services, a different approach to contract design is required for two reasons. First, offering a set of contracts to multiple contractors of different objectives, sizes, and business practices will allow each to choose the most suitable contract. Second, given that most previous studies have not considered quasi-fixed costs, it is helpful to understand two-part tariff contracts and their variants for a supplier base, new variants based on quasi-fixed costs, and related decision sequences between the parties in a supply chain. We propose a unifying methodology to set the contract parameters so that the different variants will have comparable performance outcomes. The results and the insights gained suggest that the proposed methodology should improve a retailer’s management of its supplier base and also benefit all parties throughout the supply chain.