Contract type and decision right of sales promotion in supply chain management with a capital constrained retailer

• A consignment contract should match with manufacturers’ sales promotion (MC).
• A wholesale price contract should match with retailers’ sales promotion (RP).
• Each one prefers to fully control demand if it has more power and enough capital.
• Mode MC matches for low price customers, RP for those also enjoying sales promotions.
• Our results are consistent with the practice of Best Buy, Gome and Suning.

From the practices of Chinese consumer electronics market, we find there are two key issues in supply chain management: The first issue is the contract type of either wholesale price contracts or consignment contracts with revenue sharing, and the second issue is the decision right of sales promotion (such as advertising, on-site shopping assistance, rebates, and post-sales service) owned by either manufacturers or retailers. We model a supply chain with one manufacturer and one retailer who has limited capital and faces deterministic demand depending on retail price and sales promotion. The two issues interact with each other. We show that only the combination (called as chain business mode) of a consignment contract with the manufacturer’s right of sales promotion or a wholesale price contract with the retailer’s right of sales promotion is better for both members. Moreover, the latter chain business mode is realized only when the retailer has more power in the chain and has enough capital, otherwise the former one is realized. But which one is preferred by customers? We find that the former is preferred by customers who mainly enjoy low price, while the latter is preferred by those who enjoy high sales promotion level.