Supply chain contracting with competing suppliers under asymmetric information

Abstract

This article employs a screening model to examine the problem of supply chain contracting involving one retailer and two suppliers. The two suppliers compete to sell their products, which are partial substitutes, through a common retailer. The problem is analyzed using a two-stage game. In the first stage, suppliers independently but simultaneously announce the contract bundles. The retailer, who is closer to customers, has superior market information and decides which contracts to sign. Then the suppliers invest in raw materials. In the second stage, the retailer sets prices, which in turn determine the demand rates of products, to optimize their profits. The game is analyzed for two types of contracts: two-part tariff contracts and quantity discount contracts. The retailer’s optimal strategy is derived and the suppliers’ optimal contract design for both types of contracts is fully characterized. In particular, the performance of the two types of contracts is evaluated when the two products are independent. The result suggests that the information rent is higher under quantity discounts than two-part tariffs, although the latter makes the supplier better off. Additionally, the two types of contracts are compared in terms of total supply chain profit, information rent, and suppliers’ expected profits when the two products are imperfect substitutes. Both analytical and numerical results support the proposed approach.