Sales effort free riding and coordination with price match and channel rebate

• Published in: European journal of operational research Vol. 219; no. 2; pp. 264 - 271
• Main Authors: Xing, Dahai, Liu, Tieming
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.06.2012; Elsevier; Elsevier Sequoia S.A
• Subjects: Alliances; Applied sciences; Channels; Contracts; Coordination; Discounts; Exact sciences and technology; Inventory control, production control. Distribution; Logistics; On-line systems; Operational research; Operational research and scientific management; Operational research. Management science; Operations research; Price match; Pricing policies; Rebates; Riding; Sales; Sales effort free riding; Selective rebate; Studies; Supply chain management; Supply chains; Supply chain management; Sales effort free riding; Price match; Selective rebate; Discount; Coordination; Retail marketing; Rebate; Free Rider Problem; Compensation; Profit; Contract; Logistics
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2011.11.029

► Sales effort free-riding becomes more significant with the growth of e-commerce. ► On-line retailers’ free-riding behavior reduces brick-and-mortar retailer’s effort level. ► Thus it hurts the manufacturer’s profit and the overall supply chain performance. ► We designed a contract with price match and selective rebate to coordinate sales effort. ► It outperforms other contracts in improving supply chain efficiency under effort free-riding. This paper studies sales effort coordination for a supply chain with one manufacturer and two retail channels, where an online retailer offers a lower price and free-rides a brick-and-mortar retailer’s sales effort. The free riding effect reduces brick-and-mortar retailer’s desired effort level, and thus hurts the manufacturer’s profit and the overall supply chain performance. To achieve sales effort coordination, we designed a contract with price match and selective compensation rebate. We also examined other contracts, including the target rebate contract and the wholesale price discount contract, both with price match. The numerical analysis shows that the selective rebate outperforms other contracts in coordinating the brick-and-mortar retailer’s sales effort and improving supply chain efficiency.