The effect of information asymmetry on ordering and capacity decisions in supply chains

Abstract

We revisit the problem of contracting under asymmetric information in a supply chain and highlight a few important properties that have not been reported previously. In our setting, a newsvendor retailer is endowed with superior information about the demand; the retailer may signal this information to the supplier by committing to purchasing a certain quantity in advance. Previous research has focused on characterizing the minimum quantity that convinces the supplier that demand is high. In this work, we claim that in some cases, the retailer prefers to order an even greater quantity than this minimum separating quantity, since committing to an advance purchase can result in incentives for the retailer to finance the entire capacity in the market—a choice that the retailer may not adopt absent information asymmetry. Such an outcome carries important implications regarding the efficiency of the supply chain and consumer welfare. In particular, our analysis shows that asymmetric information can result in a higher capacity in the market than the complete-information case; thus, asymmetric information can mitigate the double-marginalization problem and result in higher consumer welfare. We further conduct a comparison between the incentives of the retailer to signal the demand state to the supplier (resulting in a separating equilibrium) and the incentives of the retailer to withhold her private information from the supplier (resulting in a pooling equilibrium).