Designing optimal and practical volume discounting contracts for the dominant retailer with information asymmetry

With the increasing prevalence of huge international retail chains and the subcontracting of manufacturing to developing countries by owners of major international brands, the dominant-retailer-oriented incentive contracts become increasingly more relevant. The literature suggests that most of the contract formats known as channel-coordinating for the dominant supplier become quite or totally ineffective when the retailer is the dominant player in the supply chain. A menu of contracts is shown to be theoretically most effective for the dominant retailer; however, it is too complex to be implemented in the real world. This paper first proves that the menu of contracts is actually a nonlinear volume discounting contract. Based on this characteristic, we propose two contract formats, namely, volume discounting on markup and volume discounting on slotting fee. Our results show that these two new proposed schemes perform substantially better than the currently most-used contract formats (e.g., markup contract formats), and they can also be perceived as performing nearly as well as the menu of contracts.