Contracting with countervailing incentives under asymmetric cost information in a dual-channel supply chain

Abstract

This study investigates the optimal contract design with countervailing incentives under asymmetric selling cost information in a dual-channel supply chain comprising a manufacturer and retailer. The manufacturer’s selling cost is private and determines their reservation profit, which gives rise to type-dependent participation constraints. This study provides several intriguing results. First, when the external market correctly evaluates the selling cost advantage of the manufacturer, information asymmetry does not necessarily hamper channel efficiency, even in the dual-channel setting. Second, the retailer may distort the manufacturer’s selling quantity either upward or downward, while the retailer may distort their own selling quantity in the opposite direction. Such a synergistic effect unique to the dual channels may help the retailer balance information rent extraction and channel efficiency. Third, the manufacturer may benefit from intensified channel competition as long as the cost differential is not significant, or the cost differential is significant, but the channel substitution rate is relatively low. Finally, further examining the value of information, we demonstrate that the profit differential of the retailer (manufacturer, supply chain) exhibits an inverted U-shaped (U-shaped, hat-shaped) pattern with respect to the low-cost manufacturer’s reservation profit.