Contract design for cooperative product service system with information asymmetry

Abstract

This paper studies how to effectively provide product service system (PSS) in the supply chain with asymmetric information for service-oriented manufacturing (SOM). With a PSS, the manufacturer chooses the product quality, and the retailer, who possesses private cost information, is responsible for adding necessary value-added service based on the basic product. The analytical underpinnings of our work are provided by the principal-agent paradigm. In the paper, we develop three types of contracts and conduct a detailed comparison among the three contract models. With these studies, we find that: (i) the wholesale price contract is dominated by the other two contracts, (ii) The retail price maintenance contract can always generate a higher profit for the manufacturer and a higher welfare for the consumers, whereas the franchise fee (FF) contract can always generate a higher profit for the retailer and (iii) The FF contract can always stimulate more service from the retailer. Our theoretical and numerical results show that there are significantly different effects when the three types of contracts are utilized in the supply chain for SOM with asymmetric information, and which of them is the most attractive will depend largely on the power structure of the supply chain and/or their cost information types.