Contract strategy in a nonexclusive system under the competition

Abstract This paper studies the contract strategy of the nonexclusive supply chain, where two manufacturers supply competing products to two retailers nonexclusively. The retailers can choose a revenue‐sharing contract or a wholesale price contract to trade with the manufacturers. We compare and analyze the different contract arrangements and provide insights into the impact of the nonexclusive selling format, the product competition, and the retailer competition on the contract decision. Our results show that in the presence of nonexclusive selling, competition between retailers is an important factor in the contract choice. Existing literature has shown that the wholesale price contract enables participants to achieve Pareto improvement when the market competition is fierce. In contrast, we find that the intense retailer competition has resulted in neither the revenue‐sharing nor wholesale price contracts dominating. In this case, the negotiations between the manufacturer and the retailer on the revenue‐sharing ratio could not be successful, so they are forced to deal with a wholesale price contract. The wholesale price contracts could achieve a win‐win situation only when the retailer competition is weak and the product competition is fierce. Furthermore, in the case of exclusive selling, the revenue‐sharing contract can only be an equilibrium strategy for manufacturers and retailers, regardless of the fierce or weak competition of retailers.