Two-part tariff contracting with competing unreliable suppliers in a supply chain under asymmetric information

Abstract

We employ a two-stage game to study a two-part tariff contracting under asymmetric information in a supply chain, which consists of two unreliable suppliers and one retailer. The suppliers compete to sell their products, which are partial substitute, through a common retailer, who faces a stochastic demand and has superior information about the market. In the first stage, the suppliers simultaneously and independently announce the two-part tariff contract. The retailer, who is close to customers, decides whether to accept the two-part tariff contract. In the second stage, the uncertainty in market information, the supply information and the demand information are resolved. Then, the retailer determines the demand rates of products to optimize his profit. In this paper, we first derive the retailer’s optimal strategy and fully characterize the supplier’s optimal contract design. Subsequently, we study the impact of the degree of substitution on the equilibrium. We find that a higher degree of substitution implies a lower purchasing price but a higher fixed fee. We also evaluate the impact of supply uncertainty on the equilibriums. Finally, we conduct numerical experiments to show that the information rent is increasing with the degree of substitution. However, a larger intensity of competition is disadvantageous to the supplier.