The implication of capacity reservation contracts in assembly system with asymmetric demand information

Abstract

This paper investigates an assembly system that consists of one assembler and two suppliers who produce complementary components. The assembler possesses some private demand information that is unobservable to the upstream suppliers, and the two suppliers have to choose their capacity reservations ahead of the selling season. To induce credible vertical information sharing, we design three capacity reservation contracts: the price-quantity contract, the price-only contract and the hybrid price-quantity and price-only contract, so as to identify how the firms’ equilibrium reservation strategies and pay-offs react under different contract schemes. The results show that the assembler obtains the highest pay-off under either the price-only contract or the hybrid contract, which is determined by whether the private demand information or the demand fluctuation is sufficiently high. The suppliers’ optimal contract types are further influenced by their decision sequence. In particular, the supplier who makes decision earlier prefers the hybrid contract, while the supplier who makes decision later prefers any of the three contracts. The supply chain generates the highest pay-off from either the price-quantity contract or the hybrid contract.