Pricing and advertising in a supply chain of perishable products under asymmetric information

Abstract

We investigate a two-echelon supply chain comprising a manufacturer-leader and a retailer, who are negotiating a wholesale price contract for a perishable product. Product demand depends on retail price, product age, and investment in advertising. The retailer, who is closer to the customers, knows the exact demand function, whereas the manufacturer uses a commonly known probabilistic estimation of this function. We consider three contracts, in which responsibility for investing in advertising is borne, respectively, by the manufacturer, the retailer, or both. We distinguish between two approaches of demand estimation: commonly agreed value and probabilistic belief. We identify conditions under which the retailer decides to reveal the information at her disposal. In particular, we show that the two approaches lead the retailer to follow similar behavior patterns when attempting to answer the question: “To share or not to share?” Moreover, we find that a contract in which the manufacturer is the sole investor in advertising serves as a complete revelation mechanism, although in most cases it produces less profit for the manufacturer compared with the other two contract types. Finally, we find that the product's perishability does not affect the retailer's decision regarding whether to share private information under the commonly agreed value approach, whereas it may affect this decision under the probabilistic belief approach.