Fuzzy principal-agent model for optimal supplier switching with asymmetric information

Abstract

This paper studies a fuzzy principal-agent problem for supplier switching with taking into account the asymmetric information and the competition effect where the buying firm’s assessment to the entrant supplier’s cost is described as a fuzzy variable. The supplier switching model is set up to minimize the buying firm’s total procurement cost which includes the transfer payment to the entrant supplier, the payment to the incumbent supplier and the switching cost. Through the analysis of the participation constraint, the incentive compatibility constraint and the objective function, the equivalent model of the fuzzy principal-agent problem for supplier switching is proposed, and the optimal supplier switching strategy is obtained. It is shown that the competition effect would lead to a partial switching strategy. Additionally, the supplier switching decision under the symmetric information is also studied. Finally, an example is given to illustrate the effectiveness of the proposed model and the supplier switching strategy.