Two-part Tariff Contract Design for Distribution Channels

Power of distributors has increased in current industries. For example, large retailers like Wal-Mart have tremendous power over their suppliers. Distributors in Taiwan are also thriving, such as 7-ELEVEN. Besides physical distributors, virtual distributors like PChome also play the leading role in the supply chain. Power has shifted from suppliers to distributors, while existing literatures in this area take more emphasis on supplier-driven contracts. Hence, this thesis will discuss two-part tariff contract design from the perspective of distributors. Two-part tariff contract includes revenue sharing percentage and fixed fee.. Recently, more distributors have started to charge fixed fee, such as slotting allowance. There is controversy surrounding the increasing charging of the fixed fee. Considering distributors often sign contracts with more than one supplier, this thesis designs feasible two-part tariff contracts for two suppliers. This research is a two echelon supply chain with one distributor and two suppliers with different market share. Taking supplier competition into account and designing different contracts from a distributor-Stackelberg game. This research design contracts by formulating feasible specifications. To design feasible contracts for supply chain partners require three specifications: (1) Charge more revenue sharing percentage to smaller supplier than bigger supplier. (2) Set a clear method to charge fixed fee. (3) Profit for suppliers shouldn’t be negative. With conflicting specifications, this research shows feasible contracts under three specifications and finds it impossible to charge same fixed fee for two suppliers.