The Role of Revenue-Focused Managerial Performance Measures in Supply Chain Coordination

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Abstract

Many firms employ revenue-focused managerial performance measures (RF-MPMs) that cause managers to worry more about revenues than about costs. Although this can seemingly misalign the interests of a manager, we show that the use of such measures can help supply chain partners to overcome hold-up issues with respect to capacity and promotion investments. We develop a game theoretic model in which two supply chain partners engage in repeated interactions in which the supplier invests in capacity and the buyer invests in demand promotion. Following the realization of demand in each period, the two firms negotiate over the output quantity and wholesale price. The novelty of our model is that we allow the owners of each firm to delegate decision-making power and negotiating responsibility to a free-agent manager. We characterize the conditions under which the owners of both firms employ RF-MPMs in equilibrium and benefit from doing so. For a special case of our model, we show that for the owners of the buyer, an RF-MPM is equivalent to a price only relational contract, and that it complements a price and quantity relational contract as a mechanism for mitigating hold-up issues.

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