Designing Supply Contracts: Contract Type and Information Asymmetry

Abstract

This paper studies the value to a supplier of obtaining better information about a buyer's cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part linear schemes, and twopart nonlinear schemes), each under full and incomplete information about the buyer's cost structure. We allow both sides to refuse to trade by explicitly including reservation profit levels for both; for the supplier, this is implemented through a cutoff policy. We derive the supplier's optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts. Our key findings are as follows: First, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, the proportion of buyers the supplier will choose to exclude can be substantial.supply chains, contracting, pricing, asymmetric information

Contract designing for a supply chain with uncertain information based on confidence level

“…The relevant literature addressing contract design for a supply chain investigates explicit modeling under information asymmetry and can be divided into two lines of research: one focusing on information asymmetry in production cost (Corbett et al [4] and Ha [5]) and the other focusing on information asymmetry in market demand (Cachon et al [6], Ozer et al [7], and Gan et al [8]). Within each line, either the informed member discloses the private information in a credible way or the uninformed member provides incentive contracts to induce the revelation of true information (Fudenberg et al [9] and Chen [10]).…”

Supplier–manufacturer coordination in capacitated two-stage supply chains

“…Issues addressed by this literature range from the design of supply contracts (type of contracts, specifying parameters within a particular type of contract) to the impact of information asymmetry. A recent volume edited by Tayur et al (1999) contains four expository articles that provide a thorough review and synthesis of the emerging literature in this area (Anupindi and Bassok, 1999;Corbett and Tang, 1999;Lariviere, 1999;and Tsay et al, 1999). A more recent review can be found in Cachon (2004).…”

The buyer’s procuring mechanism under operating cost sharing in supply chain

“…Papers [7][8][9] dealed with a supply chain with two firms and asymmetric information. These papers do not consider operational characteristics such as the supplier's delivery performance.…”