REVENUE SHARING CONTRACT OR WHOLESALE PRICE CONTRACT? ANALYTICAL RESULTS FROM VARIOUS CHANNEL POWER ARRANGEMENTS IN A TOURISM SUPPLY CHAIN

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1 REVENUE SHARING CONTRACT OR WHOLESALE PRICE CONTRACT? ANALYTICAL RESULTS FROM VARIOUS CHANNEL POWER ARRANGEMENTS IN A TOURISM SUPPLY CHAIN n, College of Business, Washington State University, Wilson Road, Pullman, WA 9964, USA. xun.xu@ .wsu.edu, TEL: ABSTRACT Tourism supply hain management is a burgeoning field drawing great researh attention and inreasingly well-applied to pratie reently. We analyze a tourism supply hain ontaining a theme park, loal hotels, and multiple travel agents using a game theoreti approah in four senarios: Nash equilibrium, Stakelberg-theme park leader equilibrium, Stakelberg-the set of travel agents leader equilibrium, and full ooperation. The theme park offers wholesale prie ontrat and revenue sharing ontrat to the travel agents under eah senario. We find only in the Stakelberg-the set of travel agents leader senario, travel agents would aept the revenue sharing ontrat and make different priing strategies in order to gain higher profits. Keywords: Supply Chain Management, Tourism, Revenue Sharing, Channel Powers INTRODUCTION Pakage holiday is beoming inreasingly popular in many ountries (Yang et al. 2009). Travel agents and related ompanies form a tourism supply hain (TSC) by bundling multiple tourism features into suh pakages. A typial TSC involves suppliers and retailers who provide tourism goods, servies, and tourists to whom the servies are delivered. Downstream players inlude travel agents and tour operators that provide produts and servies to tourists. Midstream enterprises provide tourist failities suh as hotels, restaurants, transportation, and shopping failities. Upstream members provide materials to the midstream enterprises and also inlude ustomer destinations suh as theme parks (Huang et al., 202). Integration of tourism distribution hannels an inrease profits for members in the TSC (Ford et al., 202), indiating the importane of tourism supply hain management (TSCM) (Song et al., 203). TSCM, whih an be defined as the management of tourism supply hain operations with the obetive of satisfying tourists demands and ompanies eonomi goals (Zhang et al., 2009), is an emerging field that has been reeiving great attention. However, researh in this area in still in the infant stage. Coordination among the stakeholders is among the most effiient ways to manage any type of supply hain. Contrat is generally onsidered as a useful tool to oordinate stakeholders in supply hain operation (Ouardigih & Kim, 200). Our paper examines the role of revenue sharing ontrat, whih is a valuable alternative to the wholesale prie ontrat (Cahon & Lariviere, 200), in oordinating the tourism supply hain

2 Revenue sharing has been widely applied in tourism industry. For example, airlines use revenue sharing to assess ollaboration among independent arriers in the airline alliane to inrease total revenue (Cetiner & Kimms, 203). National park uses revenue sharing to divert some onservation benefits to ommunities living near to the proteted high-biodiversity areas to implement sustainable tourism (Ahebwa et al., 202). However, revenue sharing ontrat among theme park and travel agents, whih aims to inrease tourists demand and the stakeholders profits, has been rarely disussed in tourism from a supply hain perspetive. Our paper examines the mehanism of revenue sharing ontrat and wholesale prie ontrat among theme parks and travel agents under four different hannel power arrangements: () the theme park has greater deision power than that of travel agents; (2) the travel agents has greater deision power than that of the theme park; (3) the theme park and the travel agents have the same deision power; and (4) full ooperation among the theme park and the travel agents. Our researh question is: Under whih hannel power arrangement(s) the travel agents would aept revenue sharing ontrat (instead of wholesale prie ontrat) offered by the theme park and make different priing strategies to enhane profits? Overall, this paper ontributes to the extant literature in the following ways. First, the models in this study extend the number of retailers (travel agents in our example) to n instead of only or 2 as seen in most of the urrent revenue sharing literature. Seond, another supply hain level (ontaining the hotels) is added in our model. Third, this is one of the first papers to explore the mehanism of revenue sharing ontrat and wholesale prie ontrat using a game theoreti approah in the TSC. LITERATURE REVIEW TSC is a very omplex ontext with distintive features from traditional manufaturing supply hain. For the supply aspet, it is a mixture and ombination of produts and servies that are more various and perishable than in manufaturing supply hain (Zhang & Murphy, 2009) and therefore the suppliers need to be highly onneted to and oordinated with retailers (Zhang et al., 2009). From the demand aspet, it is diffiult to foreast and thus need to be arefully managed using insightful knowledge (Piboonrungro & Disney, 2009). Thus, TSCM plays an essential role in tourism industry. TSCM is a burgeoning field drawing inreasing researh attention reently. Most of the papers in TSCM are either empirial or qualitative, and only a few publiations take a modeling approah (Pairah & Mihael, 2009). To the best knowledge of the author so far, revenue sharing ontrat is mainly disussed in manufaturing supply hain ontext nowadays (e.g. Krishnan & Winter, 20). Speifially, previous literature fouses on using revenue sharing ontrat to oordinate a single manufaturer-retailer hannel (e.g. Kunter, 202) or one manufaturer and two ompeting retailers (e.g. Yao et al., 2008). However, pratially, there are multiple retailers ompeting for market share in the market. They may have the same supplier or different. Also, more parties (e.g. distributers) would involve in various ontrats to partiipate in the hannel oordination. These have been disussed little in previous studies when emphasizing on revenue sharing ontrat. Our paper extends previous analysis to inorporate multiple retailers (travel agents) and to inlude information about the third party: hotels (also known as aommodation provider)

3 Speifially, different from previous studies fousing on manufaturing supply hain ontext, we explore the mehanism of revenue sharing and wholesale prie ontrat to oordinate a TSC under four hannel power arrangements sine revenue sharing phenomenon is ommon in TSC but aademi exploration is rare. Notation Table provides the notation used in this paper. Table Notation of the Models MODELS Parameters Notation Meaning Notation Meaning α The primary demand of q Demand of holiday pakage for eah travel agent travel agent β Store-level fators of eah i q 2 Demand of rooms for travel agent that influene aommodation provider i onsumers sensitivity to prie r Competitive fators that influene onsumers sensitivity to prie π i / π 2 Profit for travel agent / p 2 Q Retail prie of rooms for eah aommodation provider Quantity of arrivals at the theme park aommodation provider i π 3 Profit for theme park φ Revenue sharing proportion (0 φ i ) of eah travel agent / 2 i u Cost for travel agent / aommodation provider i Marginal profit of the travel agent U 3 = U 3 /U 3 Deision Variables Operational ost for the theme park Marginal profit of the theme park under wholesale prie ontrat / revenue sharing ontrat from eah travel agent Notation Meaning Notation Meaning Wholesale Prie Contrat Senario Revenue Sharing Contrat Senario p w = w Retail prie of holiday pakage from travel agent under wholesale prie ontrat Tiket wholesale prie offered by theme park to eah travel agent (the same) under wholesale prie ontrat p w Retail prie of holiday pakage from travel agent under revenue sharing ontrat Tiket wholesale prie offered by theme park to eah travel agent (may be different) under revenue sharing ontrat

4 Demand Funtion We generate the following funtions. Under the wholesale prie ontrat, the profit for eah stakeholder is: i ( p w p ) q, where q p rp () 2 i i i i n i, i q ( p ) (2) 3 Q( w ) When offering the revenue sharing ontrat, the theme park offers w = φ wholesale tiket prie to eah travel agent and shares ( φ ) of the revenue from eah travel agent. We onsider four senarios of different hannel power strutures and determine the priing strategy of eah travel agent and the theme park under wholesale prie ontrat and revenue sharing ontrat, respetively. The Theme Park Dominates the Tourism Supply Chain Theme park, suh as Disneyland, Universal Studio, and so on has strong hannel powers onsidering its world-wide brand reputation and great investment. In this setion, the relationship between theme park and travel agents is modeled as a sequentially non-ooperative game, where the theme park is the leader and the travel agents are the followers. Now, we solve for the Stakelberg-theme park leader equilibrium. The theme park makes the deision first followed by travel agents who make their respetive deisions based on the theme park. Proposition predits the optimal priing strategy of eah travel agent and the theme park under the wholesale prie ontrat. Proposition : Under the wholesale prie ontrat, the Stakelberg-theme park leader game has the following unique equilibrium: k k k p w p ( 3) (4) 2 2k2 w ( nk2 nk k3n ) / 2nk2 (5) For interpretations of variables, please refer to Appendix A.. Proof: see Appendix A.. Proposition 2: Given the voluntary option of the revenue sharing ontrat, the equilibrium of the Stakelberg-theme park leader game is the same as that under the wholesale prie ontrat. Proof: see Appendix A.2. The Set of Travel Agents Dominates the Tourism Supply Chain Travel agents, suh as Expedia and Orbitz, have strong hannel powers onsidering their multiple branhes and high ustomer loyalty. In this setion, the relationship between theme park and travel agents is modeled as a sequentially non-ooperative game, where the set of (3)

5 travel agents is the leader and the theme park is the follower. Now, we solve for the Stakelberg-the set of travel agents leader equilibrium. The set of travel agents makes the deision first followed by the theme park who makes deision based on the set of travel agents. Proposition 3: Under the wholesale prie ontrat, the Stakelberg- the set of travel agents leader game has the following unique equilibrium: nb n B t A ( n ) t 2 p w p A t B w D 2 A n t For interpretations of variables, please refer to Appendix A.3. Proof: see Appendix A.3. (6) (7) Proposition 4: Given the voluntary option of the revenue sharing ontrat, the Stakelberg- the set of travel agents leader game has the following unique equilibrium: n 2n 2 3 3( n ) p ' 3 (8) B D 2 A n t w ' ' p For interpretations of variables, please refer to Appendix A.4. Proof: see Appendix A.4. (9) From proposition 4, we know eah travel agent shares φ = D B θ 2(A (n )t) p proportion of its revenue to the theme park in ompensation for its reeived lowered wholesale prie w from the theme park. Travel Agents and the Theme Park Have the Same Channel Powers in the Tourism Supply Chain When the set of travel agents and the theme park have the same or similar hannel powers, we model their relationship as a Nash Game. In the next model, we find the Nash equilibrium under the ondition that the stakeholders make their strategies independently and simultaneously. Proposition 5 indiates the optimal priing strategy of eah travel agent as well as the theme park under the wholesale prie ontrat. Proposition 5: Under the wholesale prie ontrat, the Nash game has the following unique equilibrium:

6 p D D w p n 2k 2D 3 wd 2( n 2k) For interpretations of variables, please refer to Appendix A.5. Proof: see Appendix A.5. (0) () Proposition 6: Given the voluntary option of the revenue sharing ontrat, the equilibrium of the Nash game is the same as that under the wholesale prie ontrat. Proof: see Appendix A.6. Full Cooperation in the Tourism Supply Chain The previous subsetions disussed three non-ooperative games. However, nowadays ompetition exists among supply hains instead of individual ompanies (Zhang et al., 2009). The stakeholders in the TSC may ooperate with eah other to take ations to improve profits for the entire hain. Next, we model the travel agents theme park relationship as a ooperative game. Proposition 7: The ooperation game has the following unique solution: p = w = θ 2n(r(n )+β) θ 2n(r(n )+β) + + w + p 2 (2) + (3) For interpretations of variables, please refer to Appendix A.7. Proof: See Appendix A.7. NUMERICAL EXAMPLE In this setion, we introdue a numerial example to show how the numbers hange under eah senario. The numerial results suggest the profits of stakeholders are different under various hannel power arrangements. In the senario of the set of travel agents dominating the TSC, ompared with wholesale prie ontrat, revenue sharing ontrat inreases the tourists demand by 7.3% (e.g. from to ) by lowering the retail prie of holiday pakage. As a result, the profit of eah stakeholder inreases. The profit of theme park inreases by a larger proportion ompared with eah travel agent due to the non-dereased marginal profit. The profits inrease by 3.58% for the whole TSC. Therefore, revenue sharing ontrat appears to be partiularly effetive in inreasing tourists demand and the theme park s profit when the set of travel agents dominates the TSC. Due to the length limitation, details are available upon request. Conlusions CONCLUSIONS AND EXTENSIONS Four senarios are examined in this researh: Stakelberg-theme park leader equilibrium,

7 Stakelberg-the set of travel agents leader equilibrium, Nash equilibrium, and ooperative game equilibrium. We found a unique equilibrium for eah senario under the wholesale prie ontrat and the voluntary option of revenue sharing ontrat, respetively. With regard to our researh question, the answer is only when the set of travel agents dominates the TSC, travel agents would aept the revenue sharing ontrat offered by the theme park and make different priing strategy in order to obtain higher profits. Our results are onsistent with that of Pan et al. (200) who ompare the mehanism of revenue sharing and wholesale prie ontrat based on one supplier and two retailers in a manufaturing supply hain. In addition, our numerial example shows revenue sharing ontrat ould inrease the demand and the profit for the entire TSC dominated by the set of travel agents, as ould be seen from the partiular inrease of the profit for the theme park. Managerial Impliations and Impliations for Future Researh Our paper ontains both the strengths and limitations of revenue sharing ontrat. On the one hand, when the set of travel agents dominates the TSC, our numerial example shows the benefits of revenue sharing ontrat to inrease profit for eah stakeholder. Considering the theme park and the hotels obtains more proportions of the inreased profits than that of travel agents due to the inreased demand and the non-dereased marginal profit, the theme park and hotels ould offer more motivations to make travel agents aept the revenue sharing ontrat On the other hand, revenue sharing ontrat has the same effet with that of wholesale prie ontrat under other senarios. This is another extension of the limitation of revenue sharing ontrat based on the disussion of Cahon and Lariviere (2005). Sine the administrative ost of revenue sharing ontrat is greater than that of wholesale priing ontrat due to the information asymmetry (Cahon and Lariviere, 2005), in pratie, only when the set of travel agents have more deision powers than the theme park and the enhaned profits ould offset the inreased administrative ost, revenue sharing ontrat ould be used in TSC. Three priniple impliations are proposed for further researh. First, quantitative models, whih have not been widely applied to the field of TSCs so far, should raise more attention in future researh in that they reflet the essene of stakeholder theory and predit future ations for relevant stakeholders in a mathematial way. Seond, further quantitative researh of revenue sharing mehanism on TSCs ould extend our model by adding more variables, inluding the hotels as deision makers, running numerial simulations, and disussing more senarios. Finally, other ontrats, suh as buy-bak ontrat and quantity disount ontrat whih are widely used in manufaturing supply hain, ould also be theoretially applied to TSC to disuss their effets on tourists demand and stakeholders profit. This would be another extension for TSCM researh. Appendies are available upon request. Referenes are available upon request. APPENDIX REFERENCES