Consignment or wholesale: Retailer and supplier preferences and incentives for compromise

• We evaluate the relative gains/losses realized by the contracting parties associated with consignment versus wholesale contracts.
• We develop metrics, e.g. preference ratios and relative gain ratios, that are useful to both the retailer and supplier in assessing their attraction to one contract type versus the other.
• We develop incentive payments that can potentially be used to increase the likelihood of success in negotiating an agreement.

We consider two independently managed parties, a retailer and a supplier, that are considering either a wholesale or a consignment contract to produce and market a single good. Both parties have an interest in reaching an agreement, but their first choice of contract type are generally not the same. We define the strength of retailer and supplier preferences for their respective choices of contract type as the ratio of their expected profits for their first choice of contract type over that for the alternative contract type. We study how uncontrollable factors as well as controllable factors affect the strength of retailer and supplier contract preferences. We develop incentive payments that can potentially be used to increase the likelihood of success in negotiating an agreement.