The effect of list price in a revenue sharing contract

Electronic commerce such as online retailing has created an unprecedented market place and unconventional distribution channels for suppliers and retailers. Leading the industry, Amazon.com is credited for creating innovative and efficient contracts for managing its operations and business relationship with suppliers. The newest contract offered by Amazon.com is its so-called Advantage Program. A key parameter in the contract is the product list price that Amazon.com allows a supplier to choose. Amazon.com then sets the retail price at or below supplier’s list price for selling the product to the market, and remits the supplier an amount equal to a pre-specified percentage of the list price on each unit sold. We build a game theoretic model to show that supplier’s list price acting as a constraint on retailer’s retail price in the contract plays a major role in determining firms’ decision and performance in equilibrium. In particular, by committing its retail price not to exceed supplier’s list price, the retailer can improve its own profitability without hurting the supplier.