Supply Contract Design for Competing Heterogeneous Suppliers under Asymmetric Information

Authors

Zhaolin Li, Jinan University, GuangzhouFollow
Jennifer K. Ryan, University of Nebraska - LincolnFollow
Lusheng Shao, University of Melbourne,Follow
Daewon Sun, University of Notre DameFollow

Document Type

Article

Date of this Version

5-2015

Citation

Li, E., J.K. Ryan, L. Shao and D. Sun, “Supply Contract Design for Competing Heterogeneous Suppliers under Asymmetric Information”. Production and Operations Management. 24 (2015), p. 791-807.

Comments

© 2014 Production and Operations Management Society

Abstract

This study considers a supply chain with two heterogeneous suppliers and a common retailer whose type is either low-volume or high-volume. The retailer’s type is unknown to the suppliers. The flexible supplier has a high variable cost and a low fixed cost, while the efficient supplier has a low variable cost and a high fixed cost. Each supplier offers the retailer a menu of contracts. The retailer chooses the contract that maximizes its expected profit. For this setting, we characterize the equilibrium contract menus offered by the suppliers to the retailer. We find that the equilibrium contract menus depend on which supplier–retailer match can generate the highest supply chain profit and on how much information rent the supplier may need to pay. An important feature of the equilibrium contract menus is that the contract assigned to the more profitable retailer will coordinate the supply chain, while the contract assigned to the less profitable retailer may not. In addition, in some circumstances, the flexible supplier may choose not to serve the high-volume retailer, in order to avoid excessive information rent.