Achieving optimal performance of supply chain under cost information asymmetry

Abstract

• We model an innovative contract under cost information asymmetry. • We examine how the reservation profits and balance parameter affect the profit improvement. • The increasing supplier's reservation profit decreases the lower and the upper bounds of the balance parameter. • The supplier with a higher production cost prefers a smaller balance parameter whereas the retailer prefers a larger one. • The intervals length of supply chain's profit improvement decreases in the balance parameter. This paper investigates the contract mechanism design for a supply chain under information asymmetry. Specifically, the study considers a supply chain consisting of one risk-neutral retailer and one risk-neutral supplier who has private production cost. First, we use a screening contract under information asymmetry as a benchmark. Then we propose a newly designed contract that includes the order quantity and the newly designed transfer payment, structure encompassing compensation, reward and balance parameter. This approach to the transfer payment motivates the supplier to reveal information truthfully and internalize the supply chain parties as a whole. Based on the transfer payment, we propose a new menu of contracts, and we compare the supply chain performance under two different contracts. We show that our new model achieves the first-best performance, and improve the two parties’ profits if the supplier's unit information rent does not exceed an upper bound. The increasing reservation profit of the supplier decreases the lower bound and the upper bound of the balance parameter. The supplier with a higher production cost prefers a smaller balance parameter whereas the retailer prefers a larger one. The length of intervals of the supply chain's profit improvement decreases in the balance parameter. Finally, we present a numerical example to illustrate the main results.