How to use it
- 1. Set the marketRetail price, production cost and demand (mean & standard deviation) with sliders.
- 2. Set the wholesale priceSee the retailer's order fall below the integrated optimum - the efficiency gap is double marginalization.
- 3. CoordinateMove the buyback or revenue-share slider to the coordinating value and the gauge hits 100%.
- 4. Read the splitThe stacked bars show how each contract divides the same pie - and how much is wasted.
The contract lab
Market
Contract levers
Chain profit as the wholesale price changes. The dashed navy line is the integrated benchmark Π*; the gap under any w is double marginalization. Your current w is marked.
Same pie, four ways to split it: manufacturer, retailer, and the grey slice is profit lost to the chain versus Π*. Coordinating contracts erase the grey.
Chain coordination - buyback
Try these experiments
- Push wholesale price w up to maximise the manufacturer's profit alone, and watch chain efficiency drop - the manufacturer gains but the pie shrinks.
- Set the buyback b to the coordinating value shown in the hint - efficiency hits 100% and the grey "lost" slice vanishes.
- Now match it with revenue share φ: a different split, but the buyback and revenue-share contracts reach the same coordinated chain profit.
About this tool
The concept
When each firm marks up in turn, the retailer's order-up-to point falls short of what maximises the whole chain - double marginalization.
How it works
The retailer orders to a critical fractile against its own overage/underage costs; contracts reshape those costs to restore the integrated order.
Winning strategy
Coordinate the chain: buyback and revenue-sharing can both hit 100% efficiency; they differ only in how the recovered profit is divided between the firms.