Asymmetric Demand Information Research Articles

Manufacturer encroachment with quality decision under asymmetric demand information

This paper investigates manufacturer encroachment with both endogenous quality decision and asymmetric demand information to examine the effects of encroachment and information structure on quality and profits for chain members. Manufacturer encroachment results in a signaling game where at equilibrium the retailer has to distort the order quantity downward under low market size. Our result shows that encroachment leads to a lower quality when the manufacturer’s direct selling cost is intermediate. The manufacturer always benefits from encroachment, and the retailer benefits from encroachment under an intermediate direct selling cost of the manufacturer since she can deter the manufacturer from selling directly to avoid channel competition. Results provide several information management implications. Compared to the full and no information cases, asymmetric information may increase quality when direct selling is relatively efficient while decrease quality otherwise. The manufacturer may prefer to keep information disadvantages when his direct selling cost is relatively large and the prior probability of large market size is high. Additionally, the informed retailer may be willing to share information to avoid the unexpected order quantity downward distortion in the case of asymmetric information when direct selling is efficient. As a result, the chain members reach a consensus on information sharing when the manufacturer’s direct selling cost is quite small or relatively large.

Technical Note—Optimal Long-Term Supply Contracts with Asymmetric Demand Information

We consider a manufacturer selling to a retailer with private demand information arising dynamically over an infinite time horizon. Under a backlogging model, we show that the manufacturer’s optimal dynamic long-term contract takes a simple form: in the first period, based on her private demand forecast, the retailer selects a wholesale price and pays an associated upfront fee, and, from then on, the two parties stick to a simple wholesale price contract with the retailer’s chosen price. Under a lost sales model, we show that the structure of the optimal long-term contract combines a menu of wholesale pricing contracts with an option that, if exercised by the retailer, reduces future wholesale prices in exchange for an immediate payment to the manufacturer. The online appendix is available at https://doi.org/10.1287/opre.2017.1626 .

Asymmetric retailers with different moving sequences: Group buying vs. individual purchasing

Given a quantity discount contract, retailers often prefer group buying to individual purchasing to acquire a lower wholesale price. However, under the combined effects of asymmetric demand information and different moving sequences, information revelation/acquisition between retailers may occur under group buying, thereby directly affecting their preference between individual purchasing and group buying. To capture their real preferences, we develop a model in which two retailers with asymmetric demand information purchase products from a common supplier under either individual purchasing or group buying (when moving first, later or simultaneously) and then sell to the market. We show that the informed retailer may forego group buying due to her loss of information advantage because her order quantity is revealed by the uninformed retailer. Moreover, the uninformed retailer may also reject group buying, despite obtaining demand information, because acquiring information by purposely moving later eliminates the uninformed retailer’s first-mover right and reduces his market share. Furthermore, in the context of information management, we demonstrate that the process of information revelation/acquisition harms the informed retailer to some extent but benefits the uninformed retailer to a greater extent relative to the first-best outcome under perfect information. We also address that the first-mover right becomes less valuable for both retailers with increased information value and, in particular, that their preferences concerning the moving sequence cannot reach a consensus in any case.

Optimal Partial Privatization with Asymmetric Demand Information

We study a mixed duopoly in which only the private firm directly knows product demand and examine a pooling equilibrium in which a welfare-maximizing government may partially privatize the public firm. We show that the optimal extent of privatization differs, often dramatically, from that without asymmetric information. Indeed, we identify circumstances in which the optimal extent of privatization is zero, in sharp contrast with previous work. In addition, the consumer surplus in the pooling equilibrium routinely exceeds that without asymmetric information, and the social welfare exceeds that without asymmetric information when the cost convexity is small.

Dynamic Bargaining in a Supply Chain with Asymmetric Demand Information

We analyze a dynamic bargaining game in which a seller and a buyer negotiate over quantity and payment to trade for a product. Both firms are impatient, and they make alternating offers until an agreement is reached. The buyer is privately informed about his type, which can be high or low: the high type's demand is stochastically larger than the low type's. In the dynamic negotiation process, the seller can screen, whereas the buyer can signal information through their offers, and the buyer has an endogenous and type-dependent reservation profit. With rational assumptions on the seller's belief structure, we characterize the perfect Bayesian equilibrium of the bargaining game. Interestingly, we find that both quantity distortion and information rent may be avoided depending on the firms' relative patience, and the seller may reach an agreement with either the high type or the low type first, or with both simultaneously. Furthermore, we explore our model to characterize the effect of demand forecasting accuracy on firm profitability. We find that improved demand forecast benefits the buyer but hurts the seller when the buyer's forecasting accuracy is low. However, once the buyer's forecasting accuracy exceeds a threshold, both firms will benefit from further improvement of the forecast. This observation makes an interesting contrast to previous findings based on the one-shot principal--agent model, in which improvement of forecasting accuracy mostly leads to a win--lose outcome for the two firms, and the buyer has an incentive to improve his forecasting accuracy only when it is extremely low. This paper was accepted by Yossi Aviv, operations management.

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

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.

Dynamic Bargaining in a Supply Chain with Asymmetric Demand Information

We analyze a dynamic bargaining game in which a seller and a buyer negotiate over quantity and payment to trade for a product. Both firms are impatient, and they make alternating offers until an agreement is reached. The buyer is privately informed about his type, which can be high or low: the high type's demand is stochastically larger than the low type's. In the dynamic negotiation process, the seller can screen, whereas the buyer can signal information through their offers, and the buyer has an endogenous and type-dependent reservation profit. With rational assumptions on the seller's belief structure, we characterize the perfect Bayesian equilibrium of the bargaining game. Interestingly, we find that both quantity distortion and information rent may be avoided depending on the firms' relative patience, and the seller may reach an agreement with either the high type or the low type first, or with both simultaneously. Furthermore, we explore our model to characterize the effect of demand forecasting accuracy on firm profitability. We find that improved demand forecast benefits the buyer but hurts the seller when the buyer's forecasting accuracy is low. However, once the buyer's forecasting accuracy exceeds a threshold, both firms will benefit from further improvement of the forecast. This observation makes an interesting contrast to previous findings based on the one-shot principal–agent model, in which improvement of forecasting accuracy mostly leads to a win–lose outcome for the two firms, and the buyer has an incentive to improve his forecasting accuracy only when it is extremely low.This paper was accepted by Yossi Aviv, operations management.

‘Too Little’ or ‘Too Late’: The timing of supplychaindemandcollaboration

This study examines the supply chain demand collaboration between a manufacturer and a retailer. We study how the timing of collaboration facilitates production decision of the manufacturer when the information exchanged in the collaboration is asymmetric. We investigate two collaboration mechanisms: ‘Too Little’ and ‘Too Late’, depending on the timing of information sharing between the manufacturer and the retailer. Our research results indicate that early collaboration as in the ‘Too Little’ mechanism leads to a stable production schedule, which decreases the need of production adjustment when production cost information becomes available; whereas a late collaboration as in the ‘Too Late’ mechanism enhances the flexibility of production adjustment when demand information warrants it. In addition, the asymmetric demand information confounds production decisions all the time; the manufacturer has to provide proper incentives to ensure truthful information sharing in collaboration. Information asymmetry might also reduce the difference in production decision between the ‘Too Little’ and ‘Too Late’ collaboration mechanisms. Numerical analysis is further conducted to demonstrate the performance implications of the collaboration mechanisms on the supply chain.

Complexity as a Contract Design Factor: A Human‐to‐Human Experimental Study

Despite being theoretically suboptimal, simpler contracts (such as price‐only contracts and quantity discount contracts with limited number of price blocks) are commonly preferred in practice. Thus, exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant. Using human subject experiments, Kalkancı et al. (2011) showed that such simpler contracts perform effectively for a supplier interacting with a computerized buyer under asymmetric demand information. We use a similar set of experiments with the modification that a human supplier interacts with a human buyer. We show that human interactions strengthen the supplier's preference for simpler contracts. We find that suppliers have fairness concerns even when they interact with computerized buyers. These fairness concerns tend to be even stronger when suppliers interact with human buyers, particularly when the complexity of the contract is low. We also find that suppliers are more prone to random decision errors (i.e., bounded rationality) when interacting with human buyers. In the absence of social preferences, Kalkancı et al. identified reinforcement and bounded rationality as key biases that impact suppliers' decisions. In human‐to‐human experiments, we find evidence for social preference effects. However, these effects may be secondary to bounded rationality.

The Quota-Based Compensation Plan in Fashion Retailing Industry under Asymmetric Information

We study a compensation plan problem in the fashion retailing industry, which involves a risk-neutral fashion retailer and a risk-neutral salesperson, in a two-stage game framework with asymmetric information. In the first stage, the fashion retailer provides a menu of compensation plans to the salesperson who decides which plan to sign based on his superior market demand information. Confronted with the asymmetric demand information, the fashion retailer could observe market information from the salesperson's response by designing a menu of compensation plans rather than a single one to the salesperson. In the second stage, the fashion retailer then makes production decision and the salesperson determines his selling effort. We consider both adverse selection and moral hazard. We adopt the quota-based plan to derive the fashion retailer’s optimal compensation plan design and the salesperson's best response. We emphasize the impact of the quota level on the system outcomes. The results reveal that a higher quota level is disadvantageous to the fashion retailer but advantageous to the salespersons.

Information Sharing and Channel Construction of Supply Chain under Asymmetric Demand Information

Information sharing and marketing channel building have become an important problem of supply chain management theory and practice. The research of information sharing focused on traditional channel of supply chain between upstream and downstream enterprises; however, the research ignores the behavior of information sharing with potential entrants and composite structure characteristics about traditional marketing channel with the direct channel. This paper uses the model to research the effects brought about sharing demand information with potential entrants and building marketing channel, which reveals information sharing and channel building mechanism in the supply chain. The study found that the five-force model of Porter regards potential entrants only as a threat that is one-sided. When the channel competitiveness meets certain conditions, manufacturer and retailer will share demand information with potential entrants. Building composite marketing channel is the manufacturer's absolute dominant strategy. Channel construction will increase the entry barriers for potential entrants and weaken the effect of double marginalization; meanwhile, the performance of supply chain will be augmented.

Multi-period price promotions in a single-supplier, multi-retailer supply chain under asymmetric demand information

This paper considers a two-stage supply chain in which a supplier serves a set of stores in a retail chain. We consider a two-stage Stackelberg game in which the supplier must set price discounts for each period of a finite planning horizon under uncertainty in retail-store demand. As a mechanism to stimulate sales, the supplier offers periodic off-invoice price discounts to the retail chain. Based on the price discounts offered by the supplier, and after store demand uncertainty is resolved, the retail chain determines individual store order quantities in each period. Because the supplier offers store-specific prices, the retailer may ship inventory between stores, a practice known as diverting. We demonstrate that, despite the resulting bullwhip effect and associated costs, a carefully designed price promotion scheme can improve the supplier’s profit when compared to the case of everyday low pricing (EDLP). We model this problem as a stochastic bilevel optimization problem with a bilinear objective at each level and with linear constraints. We provide an exact solution method based on a Reformulation-Linearization Technique (RLT). In addition, we compare our solution approach with a widely used heuristic and another exact solution method developed by Al-Khayyal (Eur. J. Oper. Res. 60(3):306–314, 1992) in order to benchmark its quality.

Optimal Long-Term Supply Contracts with Asymmetric Demand Information

We consider a manufacturer selling to a retailer with private demand information arising dynamically over an innite time horizon. Under a backlogging model, we show that the manufacturer’s optimal dynamic long-term contract takes a simple form: in the rst period, based on her private demand forecast, the retailer selects a wholesale price and pays an associated upfront fee, and, from then on, the two parties stick to a simple wholesale price contract with the retailer’s chosen price. We also show the structure of the optimal long-term contract under lost sales combines wholesale prices with options that coordinate the supply chain.

Pricing Games and Impact of Private Demand Information in Decentralized Assembly Systems

This paper analyzes decentralized assembly systems under asymmetric demand information and sequential contracting. We reveal new insights on the value of contract type (price-only versus complex), demand information (complete versus asymmetric), and contract sequence (first mover versus second mover) to different players. Our results for the basic model show the following: (1) Complex contracts increase the suppliers' aggregate profit; however, individual suppliers do not necessarily benefit from a complex contracting equilibrium. We identify the conditions under which each supplier benefits from such an equilibrium. (2) Eliminating information asymmetry is not always beneficial for the suppliers because obtaining information might bring only marginal value and hence might not be realistically justified. Furthermore, a downstream supplier might prefer information asymmetry to complete information, especially when demand variability is moderate. (3) Unless there is a high demand risk, the first-mover advantage is prevalent when the assembler is a price-taker.We extend our basic model to analyze two additional scenarios. First, we study cases where the suppliers may offer contracts of different complexity. Beyond enriching our understanding of contract choice in decentralized assembly systems, such variations enhance the analysis beyond the standard methodology of principal-agent models and utilize solution techniques from optimal control. Second, we analyze the situation where the suppliers may possess different levels of information on demand under complex contracts. We show that an upstream supplier always benefits from a downstream supplier's superior information. However, the additional information might decrease the downstream supplier's profit, especially when the forecast variability is low compared to the total demand variability in the system. Our results for the basic model and its extensions confirm that studying interactions between suppliers, specifically under different contract types and information structures, in assembly systems presents rich opportunities for future research.

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Supply Chain Configuration Under Information Sharing

This paper examines the effect of information sharing on supply chain configuration where the market characterized by demand uncertainty. A dynamic multi-stage game theoretic model with incomplete information is employed to capture the sequence of events. Our supply chain consists of two suppliers with exogenous wholesale prices and two retailers, the incumbent and the entrant, with asymmetric demand information. Informed incumbent prefers to conceal its private information from the entrant in order to reap more profits in the market. The channel of information flows is only through the first supplier and the incumbent can supply just from him, but the entrant is free to choose its proper supplier considering the point that the second supplier is uninformed. Our analytical model demonstrates that how the mean demand of the market, wherein our retailers compete, and its relation with the relative wholesale price of the suppliers play crucial role in equilibrium determination. Our results show under which circumstances separation and pooling equilibrium could occur in some range of demand variation. It is also shown that the entrant sometimes prefers to avoid information acquisition by choosing the second supplier and playing Cournot instead of Stackelberg which is more profitable for him in some occasions.

Contracting with asymmetric demand information in supply chains

We solve a buyback contract design problem for a supplier who is working with a retailer who possesses private information about the demand distribution. We model the retailer’s private information as a space of either discrete or continuous demand states so that only the retailer knows its demand state and the demand for the product is stochastically increasing in the state. We focus on contracts that are viable in practice, where the buyback price being strictly less than the wholesale price, which is itself strictly less than the retail price. We derive the optimal (for the supplier) buyback contract that allows for arbitrary allocation of profits to the retailer (subject to the retailer’s reservation profit requirements) and show that in the limit this contract leads to the first-best solution with the supplier keeping the entire channel’s profit (after the retailer’s reservation profit).

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Contract Complexity and Performance Under Asymmetric Demand Information: An Experimental Evaluation

Exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant. The goal of this paper is to understand why simpler contracts may commonly be preferred in practice despite being theoretically suboptimal. We study a two-tier supply chain with a single supplier and a single buyer to characterize the impact of contract complexity and asymmetric information on performance and to compare theoretical predictions to actual behavior in human subject experiments. In the experiments, the computerized buyer faces a newsvendor setting and has better information on end-consumer demand than the human supplier. The supplier offers either a quantity discount contract (with two or three price blocks) or a price-only contract, contracts that are commonplace in practice, yet different in complexity. Results show that, contrary to theoretical predictions, quantity discounts do not necessarily increase the supplier's profits. We also observe a more equitable distribution of profits between the supplier and the buyer than what theory predicts. These observations can be described with three decision biases (the probabilistic choice bias, the reinforcement bias, and the memory bias) and can be modeled using the experience-weighted attraction learning model. Our results demonstrate that simpler contracts, such as a price-only contract or a quantity discount contract with a low number of price blocks, are sufficient for a supplier designing contracts under asymmetric demand information.This paper was accepted by Christian Terwiesch, operations and supply chain management.