Supply chain partnership based on revenue sharing

The profit margin of retailers and suppliers are decreasing as more and more market players are joining the market. The customer generally switch to another brand / retailer as the price increases. Since supplier revenue depends upon the retailer's revenue; retailer's revenue indirectly depends upon the supplier's price and the customer demand; and customer demand depends upon the retail price hence it is necessary to have a business coordination to win the market. In this business partnership both partners coordinate with each other to decide the retail and wholesale price, profit margin and inventory level in stock in order to get big market share and hence higher revenue. In this paper we present a producer-retailer partnership model based on profit sharing. We assume that customer demand depends upon the retail price and tends to zero as the price of commodity tends to infinite. We propose an approach to maximize the combined profit and sharing the profit among partners proportional to their risk. The properties of the problem are explored and an optimal algorithm based on the results is presented.