Abstract
In designing supply contracts, a supplier has to consider the type of contract he can offer and the information he has about the buyer’s cost structure. In this paper we provide a framework for fleshing out these two effects in the context of a simple single-supplier single-buyer supply chain facing price-sensitive deterministic demand. There are two well-known reasons for the resulting sub-optimality (from both the supplier’s and the joint perspectives):
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Double marginalization: because the buyer and the supplier only receive a portion of the total contribution margin, their decisions do not reflect the supply-chain wide incentive structure. As a result of receiving less than the full margin at any given quantity, they will produce less than a vertically integrated monopolist.
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Asymmetric information: the supplier rarely has complete information about the buyer’s cost structure. However, the quantity the buyer will purchase (and therefore the supplier’s profits) depend on that cost structure. Somehow, the supplier will have to take this information asymmetry into account.
This research is partially supported by the Center for Operations and Technology Management of The Anderson School at UCLA.
This research is partially supported by UCLA Committee on Research Grant 92 and UCLA James Peters Research Fellowship.
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Corbett, C.J., Tang, C.S. (1999). Designing Supply Contracts: Contract Type and Information Asymmetry. In: Tayur, S., Ganeshan, R., Magazine, M. (eds) Quantitative Models for Supply Chain Management. International Series in Operations Research & Management Science, vol 17. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-4949-9_9
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DOI: https://doi.org/10.1007/978-1-4615-4949-9_9
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