Bullwhip Effect In Pricing Under The Revenue - Sharing Contract

Abstract

The amplification or absorption of price fluctuations across the supply chain is known as the bullwhip effect in pricing (BP). As there were plenty of evidence for the existence of bullwhip effect in pricing in the supply chain but these are only evidence for wholesale price-only contract (no commitments between retailers and wholesaler), the goal of this study is not only to ensure there is bullwhip effect in pricing in the case of revenue sharing contract committed between manufacturers and sellers but to elaborate conditions for this effect to happen as well. After proving the existence of bullwhip effect under this specific type of contract, the retailer’s share from revenue is analyzed to derive the direction, nature of the bullwhip effect and ultimately, this study is made to help retailers find the optimal pricing strategy in order for them to mitigate the effect of the bullwhip effect and make the most profit from sales. In order for the goal to be achieved, in this study, a deterministic model as well as stochastic newsvendor models are analyzed with additive and multiplicative uncertainty, assuming both linear and isoelastic (constant elasticity function) demand forms. In comparison to a no-contract example, this study illustrates that as the revenue-share percentage increases, the cost-pass-through and the bullwhip effect in pricing ratio increase. For the linear and isoelastic demand types, numerical simulations in Python revealed different phases of price change.