-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
1/10
MOBILE SERVICE SUPPLY COORDINATION WITH REVENUE
SHARING CONTRACTS
Yaobin Lu
[email protected]
Jiabao Lin
[email protected]
School of Management
Huazhong University of Science and Technology
Wuhan 430074, China
Phone: +86 27 87558100
Bin Wang
[email protected]
College of Business Administration
University of Texas-Pan American
Edinburg, TX 78539, USA
Phone: +1 956 3813336
Abstract: Different from the traditional supply chain, the
mobile service supply chain
has its unique characteristics. This research studies the
coordination mechanism of the
mobile services supply chain, and establishes and analyzes a
model of revenue sharing
contract. We prove that under certain conditions, the revenue
sharing contract can
achieve the maximization of expected profit and coordination of
mobile services
supply chain. We also validate the effectiveness of the model
using a numerical
example.
Key words: mobile service, coordination of supply chain, sharing
revenue, contract
1. IntroductionMobile commerce is the various commercial
information exchange and business
activities conducted on mobile communication networks using the
terminal
equipments of mobile communication (mobile phonespersonal
digital assistants and
so on) (Yuan 2006). Now there are many mobile services such as
Fetion,
Multimedia Message Service (MMS), game, ticket and mobile
payment in China. The
fields of mobile services include entertainments, news, tourism,
finance, insurance
and so on . There are many services and a large number of
consumers. Thus it is
difficult to deal with allocation of profit between the mobile
network operator (MNO)
and other members, which brings the problem of how to carry out
the optimal
distribution. As the most powerful firm in the mobile service
supply chains, the
562
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
2/10
mobile network operator not only creates most profit for itself,
but also needs to
consider optimizing and coordinating the mobile service supply
chain. Therefore, we
think it is important to conduct a study of profit allocation,
considering the mobile
operator as a central member of the mobile service supply
chain.
The content/service provider (CP) is the party most related to
the MNO that usesthe network platform of the MNO to supply
consumers with many kinds of services.
Thus without it the network platform will be nothing. In turn,
without the network
platform of MNO, CP cannot directly pass the services to
consumers even if they are
very good and need to survive depending on the mobile network
operator. It indicates
that the relationship between CP and MNO is closely
collaborative and
complementary. At present, as the creator of information and
service, the CP becomes
more and more important in the mobile service supply chain.
Therefore, we construct
a two-stage mobile services supply chain composed of one MNO and
one CP and
designed a coordinating revenue sharing contract to analyze
optimization and
coordination of mobile service supply chain.The paper is
organized as follows: In Section 2 we review previous work on
revenue sharing contracts. In Section 3 the key features of
mobile service supply
chain are discussed. In Sections 4 and 5 we define the model and
derive our findings.
A numerical illustration is provided in Section 6. The paper
ends with some
conclusion and policy implications.
2. Related literature
Supply Chain Management (SCM) refers to the use of a total
system approach to
manage the flow of materials, information and service to fulfill
the customers
demand. Now, research on SCM has been gaining traction (e.g.,
(Shapiro 1984;
Houlihan 1985) )and the focus is on the coordination,
optimization and recombination
of the supply chain. The coordination of the supply chain
includes the coordination
between manufacturers and suppliers, between manufacturers and
retailers, and the
coordination of internal activities among manufacturers,
suppliers and retailers. The
supply chain system has both centralized and decentralized
models. A centralized
supply chain system views the supply chain as one entity that
possess all the
information on the whole chain related to decision making, which
allows the
optimization of supply chain performance. The centralized
control assures system
efficiency, but it is rarely realistic. In a decentralized
supply chain system, there areseveral self-concerned profit
maximizing members. So it is difficult to optimize the
revenue of the whole supply chain. As a result, coordination
mechanisms are
necessary so as to have decision-makers pursue channel
coordination.
Supply chain contract is one of the most important coordination
mechanisms. It
refers to the provision of appropriate information and incentive
measures to assure
both buyer and seller coordination and optimization of the sale
channel. In a word,
supply chain contract utilizes incentives to make supply chain
actors decisions
coherent. In particular, the incentives allow the risk and the
revenue be shared by all
supply chain partners. Therefore, supply chain contracts have
two main objectives.
First, it increases the total supply chain profit and achieves a
profit that is close to the
563
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
3/10
one under a centralized control. Second, it allows risk sharing
among the supply
chain participants(Tasy 1999). In 1985, Pasternack(1985) firstly
proposed the concept
of supply chain contract. Ever since then researchers have
examined supply chain
contracts extensively(Cachon and Larviere 2002). Supply chain
models mainly
include revenue sharing contracts, quantity flexibility
contracts, buy back contracts,and the wholesale price contracts.
The wholesale price contracts and the buy back
contracts are firstly studied and also are the most common
contracts. Moreover, they
respectively embody the core contents of supply chain: member
revenue and product
quantity. Others contracts such as the quantity discount
contract and the sale rebate
contract evolved from the four basic contracts.
Revenue sharing contract is a coordinating mechanism where a
retailer pays a
supplier with a low wholesale price for each unit purchased,
plus a percentage of the
revenue the retailer generates. Such contract has become
prevalent in the
videocassette rental industry. A typical case is Blockbuster, a
movie rental firm. In a
conventional sale agreement, Blockbuster purchases each tape
from its supplier for$65 and charges about $3 per rental. As a
result, the breakeven point is at 22 rentals.
However, because the demand for a movie is usually high when it
is new on tape and
diminishes very quickly, Blockbuster doesnt have the incentive
to purchase a large
enough number of tapes to meet the initial high demand. To solve
this problem, in
1998, Blockbuster started paying its suppliers a portion (50%)
of its rental income so
as to get a lower wholesale price of $8. Under this situation,
the break-even point for a
tape dropped to approximately six rentals, enabling Blockbuster
to purchase more
tapes to meet initial demand. Blockbusters market share of video
rentals climbed
from 24% in 1997 to 40% in 2002.
There are several theoretical and empirical studies of revenue
sharing contracts.
Mortimer (2000) studied revenue sharing contracts and found that
they increased an
industrys total profit by 7%. Dana and Spier (2001) considered a
supply chain with
competitive retailers and stochastic demand. They derived
optimal revenue sharing.
Recently, Veen and Venugopal (2005) examined a simple twolevel
supply chain
that was composed of a movie studio and a video rental shop. In
particular, they
contrasted three different mechanisms and proposed that revenue
sharing contract
could optimize the chain and bring win-win situation to the
players in the industry.
Cachon and Lariviere (2005) studied revenue sharing contract in
a general supply
chain model with revenue determined by each retailers purchase
quantity and price.They identified its strengths and limitations.
The effectiveness of revenue sharing was
compared with other coordination mechanisms such as buy-back
contracts and
price-discount contracts. Demirkan and Cheng (2006) studied a
supply chain
composed of one application service provider (ASP) and one
application
infrastructure provider (AIP). They examined the supply chains
performance under
different coordination strategies involving risk and information
sharing between the
ASP and the AIP. Recently, Ilaria and Pierpaolo (2004) proposed
a model of revenue
sharing contracts aiming at coordinating a three-stage supply
chain. The above
literatures mainly address the problem of coordinating supply
chain made up of two
stages. Moreover, most of them study product supply chain not
service supply chain.
564
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
4/10
Little literatures involve the coordination of service supply
chain that provides service.
In this paper, we develop a revenue sharing contract model to
examine the
coordination of the mobile supply chain.
3. Mobile service supply chainAs one of service supply chains,
the mobile service supply chain has the
following properties. First, this supply chain provides
customers with service
products that can not be physically stored. Thus, there is no
service inventory being
produced and stored ahead of schedule. Therefore, in the mobile
service supply chain,
CP and MNO are inevitably pulled by demand, which is obviously
different from the
traditional supply chain that only has partly pull periods.
Second, mobile service
products are technological network products. The process of
passing products from
the CP to the MNO is also that of manufacturing and selling
them. The MNO can
manufacture products as long as the network is available. If the
network capacity is
large but there are not enough customer demand, the overstock of
mobile services willarise. In addition, the order quantity is
continuous in traditional supply chain. But the
sunk network capacity is only a series of discrete value in
mobile service supply chain.
Third, usually, the services that the CP produces are
information goods. One of the
most fundamental features of information goods is that the cost
of production is
determined by the first-copy costs. Once the first copy of the
information has been
produced, additional copies cost is approaching zero. In other
words, the cost of
production is relatively stable no matter how much information
goods were produced.
Fourth, the mobile service supply chain is much more unstable
than the traditional
supply chain owing to diversity and unpredictability of the
service demand.
Therefore, different from the research on traditional supply
chain, we need to
introduce new propositions and consider the simultaneity of
passing products and
manufacturing products in mobile service supply chain. Can
revenue sharing contract
optimize the profit of mobile service supply chain? How does the
contract achieve
optimal distribution of profit between CP and MNO? What is the
optimal proportion
of distribution? These questions are related with all parties in
service supply chain. So
we analyze the coordinating mechanism of mobile service supply
chain in the context
of some entertainment services.
4. Model and propositionsWe consider a two-level mobile service
supply chain that is composed of one
mobile network operator (MNO) and one Content/Service Provider
(CP). In this
supply chain, the CP rents the MNOs network capacity to pass
information goods
from itself to the MNO at a unit price . The CP sells
information goods that are
produced by itself to customers at a unit price p. The sales
revenue is first obtained by
the MNO, and then the sale revenue is distributed between the
MNO and CP (Lu
Yaobin et al. 2007). The research model is shown in Figure
1.
565
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
5/10
566
Figure 1. The mobile service supply chain
We outline basic assumptions of the model as follows:
1For the model, we just consider one given sale period N in
which the networkcapacity iq 1,2...i = nis a series of discrete
value. The fixed cost is denoted
bym i
c 1,2...i = nin different network capacityi
q 1,2...i = n.
2Sale price of per unit service is p . The service demand that
correlates withservice price p is a random variable denoted by ( )D
P . ( , )F x p denotes the
distribution and ( , )f x p denotes the density function of
demand( 0x ). We
assume that ( , )F x p is twice differentiable and( , )F x p
p0
> for every p .
3 0c denotes the MNOs per unit variable cost of service. Usually
the variablecost is very small. For example, the variable cost of
passing a SMS is by 0.01
RMB, but the quantity of service is large, so the variable cost
is needed.
4The variable cost of the CP for per unit service and the fixed
cost of the CP arerespectively denoted by 2sc and 1sc .
5 (0 1) is the quota of the MNOs revenue that the MNO keeps
whilegiving the rest (1 ) to the CP.
Let be expected sales,( , )iS q p { }( , ) min( , ( ) )i iS q p
E q D p=
=0
m in ( , ) ( , )iq x f x p d x
= 0
(1 ( , )) ( , )iq
i iq F q p xF x p d + x
dx 10
( , )iq
iq F x p=
Under the revenue sharing contract, the MNOs profit function
is
0( , ) ( , ) ( , ) ( , )m i i i i m iq p p S q p S q p c S q p c
= + 2
Content Provider
Service Provider MNO customerservice service
p content
CP
fund
actor
service/information flow
possible condition
fund flow
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
6/10
the CPs profit function is
2( , ) (1 ) ( , ) ( , ) ( , ) 1s i i i s iq p pS q p S q p c S q
p cs = 3
and the supply chains profit function is
0 2 1( , ) ( , ) ( ) ( , )i i s i sq p p S q p c c S q p c c = +
m i 4
5. Supply chain coordination
In this section, we consider optimizing and coordinating the
mobile service
supply chain. From equation4, we can find that:
0 20 0
( , ) ( , )( , ) ( )
iq qii s
q p F x pq F x p dx p c c
p p
idx
=
5
2 2
0 22 20 0
( , ) ( , ) ( , )(2 ( ) )
i iq qi
s
q p F x p F x pdx p c c dx
p p p
= +
6
Under certain conditions, the function ( , )iq p has a
maximum.
Proposition 1. For a given network capacity , there exists a
unique optimal priceiq
*
ip that maximizes the supply chains profit function ( , )iq p
when 0 2s p c c + and
2
2( , )
0F x p
p .
Proof: Based on 0 2s p c c + 2
2
( , )0
F x p
p
we can prove that
2 2
0 22 20 0
( , ) ( , ) ( , )(2 ( ) ) 0
i iq qis
q p F x p F x pdx p c c dx
p p p
= +
.
Therefore , the supply chains profit function ( , )iq p is
concave and( , )iq p
p
is
diminishing in sale price p ( ).0 2[ ,s p c c + ]
2When 0 s p c c= + , we find that
0
( , )( , ) 0
iqii
q pq F x p dx
p
=
(7)
( , )F x p
p
is increasing in sale price p owing to
2
2
( , )0
F x p
p
.
Thereforewhen 2 0 2s p c c> + ,we find that
567
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
7/10
2 00 0
( , ) ( , )| |
i i
s
q q
p p p c c
F x p F x pdx dx M
p p= = +
> =
2 2 0 2
is
q p c c
M> + +
2 22 0 20 0
( , ) ( , )| ( , ) ( ) |
i iq qi
p p i s p p
q p F x pq F x p dx p c c
p p= =
dx
=
20 2 0
( , )( ) |
iq
i s p
F x pq p c c d
p= p x
0ii
qq M
M< = (8)
From7and8, for a given network capacity there exists a
uniqueiq*
ip to cause
*
( , )| ii p p
q p
p =
= 0 .Therefore,*
ip is the optimal solution to the problem m .ax ( , )iq p
From Proposition 1, we know that there exists a unique optimal
price *ip that
maximizes the supply chains profit for different network
capacity . When the
supply chains profit is maximized, can revenue sharing contract
coordinate the MNO
and the CP? We will answer this question in Proposition 2.
Let
.
iq
*( , ) max ( , )i i i
q p q p =
Proposition 2. With revenue sharing contract,
when 0 2(1 ) sc c = , 1/( )mi s mic c c = +
( , )m i
q p
, the MNOs profit function and the CPs
profit function are respectively ( , )i
q p =
and ( , ) (1 ) ( , )s i i
q p q p = and }{ *,i iq p simultaneously makes the MNOs
profit
and the CPs profit maximized.
Proof: Given the profit function ( , ) ( , )m i iq p q p = , it
follows that
}{ *,i iq p maximizes the MNOs profit when 0 > . To obtain (
, ) ( , )m i iq p q p = ,
substitute 0(1 ) 2sc c = and 1/( )mi s mic c c = +
( ,m iq p
into (2) and simplify. The CPs
profit function follows from ) ( , )iq p = and
.( , )s iq p ( , ) ( ,i m iq p q )p = W
Proposition 2 indicates that is the MNOs share of mobile service
supply
chains profit in additional to its share of revenue. Thus,
revenue sharing contract
568
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
8/10
coordinates the supply chain. In addition, revenue sharing
coefficient merely
correlates with the MNOs and the CPs fixed cost and has no
relation to market
demand.
6. Numerical explorationTo obtain further insights on the mobile
service supply chain, we conduct
numerical analyses on findings in the previous section. We
assume sale period N=1,
the variable cost of per unit service of CP 2sc =0.1 , the MNOs
per unit variable
cost of service =0.2 and the fixed cost of CP0c 1sc =1.50
million . We assume
customer demand obey exponential distribution and the
distribution function is
1 , 0 2( )m np = ( , )
0, 0
x
e xF x p
x
>=
, 300m , 100n= = .The relationship between
network capacity and fixed cost is shown in Table 1. Based on
Proposition 2
and table 1, we calculate the supply chain coordination
parameters
iq mic
and in T le
2. It indicates that an increase of
ab
and a decrease of respectively reduce the
MNOs and the CPs risk to coordinate the supply chain.
Network capacity million timeiq Fixed cost million mic
10 0.2030 0.40
60 0.60
100 0.75
150 0.90
250 1.10
300 1.30
400 1.40
500 1.60
700 1.80Table 1: Network capacity and fixed cost
After some algebra, we find that
( , )iS q p = =0
dx( , )iq
iq F x p 22 (300 100 )(300 100 ) [1
iq
pp e
]
and22 (300 100 )( , ) ( 0.3)(300 100 ) [1 ] 150
iq
p
i miq p p p e c
= .
569
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
9/10
Fixed cost million mic(%) ()
0.20 11.76 0.1647
0.40 20.05 0.1399
0.60 28.57 0.11430.75 33.33 0.1000
0.90 37.50 0.0875
1.10 42.31 0.0731
1.30 46.43 0.0607
1.40 48.28 0.0552
1.60 51.61 0.0452
1.80 54.55 0.0364
Table 2: Coordination parameters and
Using Matlab7.0, we calculated the optimal sale price and the
supply chains profit
under given network capacity. The results are shown in Table 3.
With the increase of
network capacity, the optimal sale price is diminishing, which
increases the supply
chains profit.
iq
(million
time
*
ip
*( , )i iq p
(million
)
*( , )m i iq p
(million )
*( , )s i iq p
(million )
10 2.4141 16.640 1.956864 14.683136
30 2.1935 43.607 8.743203 34.863797
60 2.0250 74.648 21.327 53.321
100 1.8877 106.65 35.546 71.104
150 1.7727 137.48 51.555 85.925
250 1.6245 181.14 76.640 104.50
300 1.5719 197.02 91.476 105.54
400 1.4910 221.48 106.930 114.55
500 1.4312 238.80 123.240 115.56
700 1.3491 260.71 142.220 118.49Table 3: The optimal sale price
and supply chain profit
7. Conclusions
This paper studies the mobile service supply chain composed of a
mobile
network operator and a single content / service providers.
Mobile service supply chain
in which the product is service is different from the
traditional supply chain.
Therefore, the model does not consider the inventory problem and
we regard the
network capacity as a discrete value. The main contributions of
this paper are that we
apply revenue sharing contract to the mobile service supply
chain and prove that
under certain conditions the contract can optimize and
coordinate the supply chain.
570
-
8/3/2019 Xxxx Lu Lin - Mobile Service Supply Coordination With
Revenue Sharing Contracts
10/10
571
Although revenue sharing contract is a strong coordination of
contracts, in the
traditional product supply chain, it is difficult to implement.
The supplier does not
want to use this contract because it does not know the retailers
actual income leads to
the drastic decrease of supplier profit. However, in our model,
sales revenue is
collected by the mobile network operator. The mobile network
operator and thecontent / service provider share sale revenue
further. There is no extant problem of
traditional supply chain in this model. Therefore, revenue
sharing contract can well
coordinate the mobile service supply chain.
8. Acknowledgements
This work was partially supported by a grant from the National
Natural Science
Foundation of China (No. 70731001) and a grant from the National
Social Science
Foundation of China (No. 06BJY101).
ReferencesCachon, G. and M. Larviere (2002). Supply chain
coordination with contracts.
Working Paper,University of Pennsylvania.
Cachon G. and Larviere M. (2005). Supply chain coordination with
revenue sharing
contracts: strength and limitations.Management Science 51(3),
30-44.
Dana J. and Spier K. (2001). Revenue sharing and vertical
control in the video rental
industry.Journal of Industry Economics 59(3), 223-245.
Demirkan H. and Cheng H.K. (2006). The risk and information
sharing of application
services supply chain.European Journal of Operational Research,
1-20.
Houlihan, J. B. (1985). International supply chain management.
International Journal
of Physical Distribution and Materials Management15(1),
22-38.
Ilaria G. and Pierpaolo P. (2004). Supply chain coordination by
sharing revenue
contracts.International Journal of Production Economics 89(3),
131-139.
Lu Yaobin, Dong Yuanyuan and Wang Bin (2007). Mobile business
value chain in
China: A Case study.International Journal of Electronic Business
5(5), 460-477.
Mortimer J. (2000). The effects of revenue-sharing contracts on
welfare in
vertically-separated markets: evidence from the video rental
industry. Working paper,
University of California at Los Angeles, Los Angeles, CA.
Pasternack, B. A. (1985). Optimal pricing and returns policies
for perishable
commodities.Marketing Science 4(2), 166-176.Shapiro, R. D.
(1984). Get leverage from logistics. Harvard Business Review
5(3),
119-127.
Tasy, A. A. (1999). The quantity flexibility contract and
supplier-customer incentives.
Management Science 45(10), 1339-1358.
Veen J. and Venugopal V. (2005). Using revenue sharing win-win
in the video rental
supply chain.Journal of Operational Research Society 56(7),
757-762.
Yuan, Y. (2006). Mobile commerce, Beijing:Tsinghua University
Press.
