Contracting with asymmetric demand information in supply chains

Contracting with asymmetric demand information in supply chains

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Article ID: iaor201111033
Volume: 217
Issue: 2
Start Page Number: 333
End Page Number: 341
Publication Date: Mar 2012
Journal: European Journal of Operational Research
Authors: , , ,
Keywords: simulation: applications, stochastic processes, combinatorial optimization
Abstract:

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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