Revenue Sharing and Information Leakage in a Supply Chain

This work explores the potential of revenue-sharing contracts to facilitate information sharing in a supply chain and mitigate the negative effects of information leakage. We consider a supplier who offers a revenue-sharing contract to two competing retailers, one of whom has private information about uncertain market potential and orders first. This order information may be leaked to the uninformed retailer by the supplier to realize higher profits. We show that the incentives of the supplier and retailers are better aligned under a revenue-sharing contract, as opposed to under a wholesale-price contract, reducing the supplier's incentive to leak. This is true for a wide range of wholesale prices and revenue-share percentages and is more likely when the revenue-share percentage is higher and when variation in demand is greater. Preventing information leakage may result in higher profits not only for the informed retailer and supplier but surprisingly even for the uninformed retailer. Our results are robust when the model is generalized along various dimensions. <i>This paper was accepted by Yossi Aviv, operations management.</i>