Supply Chain Rent Distribution Under Bayesian Belief When the Buyer Invests in Specific Assets

Abstract

Supply chain coordination and collaboration in general requires dedicated investments by the members of the chain in order to decrease cost, increase capacity or mitigate risks. Common assumptions in the literature include predefined contractual structures, common information on capacity, costs and the value added through the intended action. On the other hand, evidence suggests that the extent of supply chain collaboration is still not as prevalent as theory would predict, indicating that true decision-makers may operate under different assumptions. Ina stylized dyadic supply chain model we prove the existence of equilibria under which information asymmetry between supplier and manufacturer is preferred to information sharing when relation-specific investment information is involved. We use a Stackelberg model for the single-period interaction between two parties when the downstream party has to undertake a relationship-specific investment. Both parties have outside options to avoid monopsony-monopoly rents. The supplier uses his Bayesian belief regarding the relationship-specific investment cost, leading to a tradeoff between rent extraction and sharing of coordination benefits. We provide closed form results for the supplier's contract and resulting information rent distribution when the belief follows common distribution functions such as those with increasing failure rates A numerical instance illustrates the results.