Notes: Actors actions are not always in the best interest of the members in the supply chain, i.e.

, the supply chain members are primarily concerned with optimizing their own objectives, and that self-serving focus often results in poor performance. However, optimal performance is achievable if the firms coordinate by contracting on a set of transfer payments such that each firms objective becomes aligned with the supply chains objective Breakeven video rental = 22 rentals (@$65 per tape) Typically Whole sale price could be set at marginal cost, but in case of revenue sharring, by deferring revenue to optimize demand supply matching the wholesaler could set the price of the video cassette to be below the marigal cost. To overcome this problem, in 1998 Blockbuster agreed to pay its suppliers a portion of its rental income (probably in the range of 30 percent to 45 percent, based on publicly available information about similar contracts) in exchange for a reduction in the initial price per tape from $65 to $8. The break-even point dropped to about six rentals, allowing Blockbuster to purchase many more tapes and sustain its Go Home Happy campaign.

Limitations of Revenue Sharing: Supplier not trusting retailer to provide with an accurate revenue picture without extra checks and balances which reduces profits. The existence of other competitive players who service the market causing the revenues to vary based on competitors actions. A considerable amount of demand is generated by retailers who will be doing the extra heavy lifting through

Finally, the third limitation is that revenue sharing does not coordinate the supply chain when the retailers effort influences the demand and this effort is not contractable (for example, advertising, service quality, and store presentation). When demand is sufficiently influenced by retail effort, revenue-sharing contracts should be avoided, according to Cachon and Lariviere. They make the case that a quantity discount would allow coordination of the supply chain with effort-dependent demand and allocate rents without the use of fixed fees. In quantity-discount contracts, the cost to the retailer is based on the volume purchased, with the price decreasing as more units are purchased. With a quantity-discount contract, the supplier earns the same profit no matter what the demand whereas with revenue sharing the supplier bears some demand risk. Revenue sharing is a valuable strategy in an industry such as video rentals where administrative costs are low and retail effort does not have much impact on demand. If systems are available to track sales or rentals, it would not be difficult for suppliers to verify revenues. The authors point out that almost all video stores have systems of computers and bar codes to track each tape rental, so it should not be difficult for the suppliers to monitor and verify revenues. Also, in a video rental store the retailer

merely displays boxes of available tapes from which customers make their selections. Unlike home appliance or automobile retailing, customers do not make their video selection after substantial consultation with a retail salesperson (which requires effort). Although there are limits to revenuesharing contracts, Cachon and Lariviere suspect that other industries have yet to discover their virtues. 1-Supplier/1-retailer : newsvendor problem: