Dynamic Business Share Allocation in a Supply Chain with Competing Suppliers

Abstract

This paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring. We present a principal-agent model for managing long-term supplier relationships using a unique form of measurement and incentive scheme. We measure a supplier's overall performance with a rating equivalent to its continuation utility (the expected total discounted utility of its future payoffs), and incentivize supplier effort with larger allocations of future business. We obtain the vector of the two suppliers' ratings as the state of a Markov decision process, and solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome.Our contributions are both theoretical and managerial: We propose a repeated principal-agent model with a novel incentive scheme to tackle a common, but challenging incentive problem in a multi-period supply chain setting. Assuming binary effort choices and performance outcomes by the suppliers, we characterize the structure of the optimal contract through a novel fixed-point analysis.Our results provide a theoretical foundation for the emergence of "business-as-usual" (low effort) trapping states and tournament competition (high effort) recurrent states as the long-run incentive drivers for motivating critical suppliers.

The Allocation of Future Business: Dynamic Relational Contracts with Multiple Agents

“…Section III has a detailed comparison. Other contributions include Taylor and Wiggins (1997), who compare competitive and relational supply chains but do not consider dynamics, and Li, Zhang, and Fine (2013), who focus on formal cost-plus contracts.…”

Dynamic Incentive Mechanism Design for Recycling Construction and Demolition Waste under Dual Information Asymmetry

“…They obtained the reputation compensation and the cost type displayed by the manufacturer and achieved the goal of weakening the ratchet effect. Li et al [32] studied the multi-stage dynamic coordination of a two-stage supply chain according to the principal-agent theory framework. Under dual information asymmetry, Wang et al [33] designed a dynamic commercial credit incentive contract to motivate the retailer to disclose its true costs, for increasing supply-chain profits.…”

Green Procurement Relationships Development under Carbon Emissions Regulations: A Bi-Level Programming Approach

“…As for sourcing products from potential suppliers, an infinitely repeated game model was developed to solve this issue. Considering manufacturer cannot directly observe the effort of supplier which devoted during their cooperation process, Li et al [ 30 ] emphasized on a long-term relationship between one manufacturer and two suppliers by presenting a repeated game model with an incentive scheme. Tang and Rai [ 31 ] studied the influence of two process capabilities on supplier relationships management.…”