Using Contract Mechanisms to Coordinate Product Line Decisions

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 quot;slotting allowancequot; 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