Cost‐sharing contracts and wholesale price signaling: enhancing profitability and financing access for small and medium‐sized resellers

Abstract High sales costs and limited procurement capital faced by small‐ and medium‐sized resellers (SMRs) constitute significant barriers that erode manufacturers' profitability and impede improvements in overall supply chain performance. To address these challenges, manufacturers commonly adopt cost‐sharing contracts to partially subsidize SMRs' sales expenditures and support them in obtaining bank financing for procurement. To investigate the interplay among cost‐sharing mechanisms, financing decisions, and operational dynamics, this study develops a wholesale price signaling game model and derives several key insights. First, irrespective of the retail price level, when the manufacturer's cost‐sharing ratio is low, the cost‐sharing contract incentivizes the manufacturer to offer differentiated wholesale prices to SMRs with higher initial capital. Conversely, when the retail price is low and the manufacturer's cost‐sharing ratio is elevated, the manufacturer is incentivized to offer a pooling wholesale price to SMRs with higher initial capital. Moreover, under the cost‐sharing contract, even when SMRs have lower initial capital, the manufacturer would offer differentiated wholesale prices to help banks distinguish between SMR types, thereby offering tailored financing rates. Lastly, cost‐sharing contracts are found to increase the motivation of manufacturers with low production costs to differentiate between SMR types while diminishing the same motivation for manufacturers with higher production costs.