Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/15171
Title: Contracting and coordination under asymmetric production cost information
Authors: Cakanyildirim, M
Feng, Q
Gan, X 
Sethi, SP
Keywords: Adverse selection
Contracting
Demand uncertainty
Supply chain efficiency
Type-dependent reservation profit
Issue Date: 2012
Publisher: Wiley-Blackwell
Source: Production and operations management, 2012, v. 21, no. 2, p. 345-360 How to cite?
Journal: Production and operations management 
Abstract: We analyze a supply chain consisting of a supplier and a retailer. The supplier's unit production cost, which characterizes his type, is only privately known to him. When trading with the retailer, the supplier demands a reservation profit that depends on his unit production cost. We model this problem as a game of adverse selection. In this model, the retailer offers a menu of contracts, each of which consists of two parameters: the ordering quantity and the supplier's share of the channel profit. We show that the optimal contract depends critically on a surrogate measure-the ratio of the types' reservation profit differential to their production cost differential. An important implication from our analysis is that information asymmetry alone does not necessarily induce loss in channel efficiency. The optimal contract can coordinate the supply chain as long as the low-cost supplier's cost efficiency is neither much overvalued nor much undervalued in the outside market. We further discuss the retailer's preference of the supplier's type under different market conditions, as well as evaluate the effects of the supplier's reservation profit, the retail price, and the demand uncertainty on the optimal contract.
URI: http://hdl.handle.net/10397/15171
ISSN: 1059-1478
EISSN: 1937-5956
DOI: 10.1111/j.1937-5956.2011.01258.x
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