Business A

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Revenue-sharing and Cost-sharing Contracts
Question 1
A revenue-sharing contract is an agreement involving a retailer and a manufacturer where a retailer purchases every unit of a product at a wholesale price from a manufacturer and pays an additional percentage of revenue that the retailer generates to the manufacturer. These type of contracts are common in the video cassette rental industry. There are various advantages and disadvantages of revenue sharing for the manufacturer and retailer.
The benefit of the revenue-sharing contract to the retailer is that he/she can get products at a reduced price. This situation helps to reduce the risk since the retailer shares it with the manufacturer. There is an opportunity for the retailer to earn more profit from the contract. The disadvantage of the agreement is that the retailer finds it difficult to work effectively with other suppliers that are not involved in a revenue-sharing contract. The contract cannot work well unless the retailer provides accurate information regarding revenues. The retailer has to bear the burden of high administration cost since there is a need for an excellent information system on revenues for trust to be established. The revenue of a retailer depends on the actions of all other competitors in the market. A revenue-sharing contract does not consider the retailer’s effort including advertising, service quality and…