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Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information

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Author Info

  • Özalp Özer

    ()
    (Department of Management Science and Engineering, Stanford University, Stanford, California 94305)

  • Wei Wei

    ()
    (Morgan Stanley, 20 Cabot Square, Canary Warf, London, United Kingdom)

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    Abstract

    We study the important problem of how to assure credible forecast information sharing between a supplier and a manufacturer. The supplier is responsible for acquiring the necessary capacity before receiving an order from the manufacturer who possesses private forecast information for her end product. We address how different contracts affect the supplier's capacity decision and, hence, the profitability of the supplier and the manufacturer. We fully develop two contracts (and provide explicit formulae) to enable credible forecast information sharing. The first is a nonlinear capacity reservation contract under which the manufacturer agrees to pay a fee to reserve capacity. The second is an advance purchase contract under which the manufacturer is induced to place a firm order before the supplier secures the component capacity used to build the end product. These contracts serve a strategic role in information sharing. The capacity reservation contract enables the supplier to detect the manufacturer's private forecast information, while the advance purchase contract enables the manufacturer to signal her forecast information. We show that channel coordination is possible even under asymmetric forecast information by combining the advance purchase contract with an appropriate payback agreement. Through our structural and numerical results we also show that the degree of forecast information asymmetry and the risk-adjusted profit margin are two important drivers that determine supply chain efficiency and which contract to adopt.

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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0521
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 52 (2006)
    Issue (Month): 8 (August)
    Pages: 1238-1257

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    Handle: RePEc:inm:ormnsc:v:52:y:2006:i:8:p:1238-1257

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    Related research

    Keywords: game theory; screening; signaling; coordination; supply contracts; capacity reservation; advance purchase; payback; asymmetric information; forecast;

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    Citations

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    Cited by:
    1. Guo, Pengfei & Song, Jing-Sheng & Wang, Yulan, 2010. "Outsourcing structures and information flow in a three-tier supply chain," International Journal of Production Economics, Elsevier, vol. 128(1), pages 175-187, November.
    2. Babich, Volodymyr & Li, Hantao & Ritchken, Peter & Wang, Yunzeng, 2012. "Contracting with asymmetric demand information in supply chains," European Journal of Operational Research, Elsevier, vol. 217(2), pages 333-341.
    3. Löffler, Clemens & Pfeiffer, Thomas & Schneider, Georg, 2012. "Controlling for supplier switching in the presence of real options and asymmetric information," European Journal of Operational Research, Elsevier, vol. 223(3), pages 690-700.
    4. Oksana Loginova & X. Henry Wang & Chenhang Zeng, 2012. "Learning in Advance Selling with Heterogeneous Consumers," Working Papers 12-08, NET Institute, revised Sep 2012.
    5. Xu, He & Yao, Nian & Tong, Shilu, 2013. "Sourcing under cost information asymmetry when facing time-sensitive customers," International Journal of Production Economics, Elsevier, vol. 144(2), pages 599-609.
    6. Mukhopadhyay, Samar K. & Yue, Xiaohang & Zhu, Xiaowei, 2011. "A Stackelberg model of pricing of complementary goods under information asymmetry," International Journal of Production Economics, Elsevier, vol. 134(2), pages 424-433, December.
    7. Geng, Qin & Minutolo, Marcel C., 2010. "Failure fee under stochastic demand and information asymmetry," International Journal of Production Economics, Elsevier, vol. 128(1), pages 269-279, November.
    8. repec:umc:wpaper:1213 is not listed on IDEAS
    9. Kurata, Hisashi & Nam, Seong-Hyun, 2013. "After-sales service competition in a supply chain: Does uncertainty affect the conflict between profit maximization and customer satisfaction?," International Journal of Production Economics, Elsevier, vol. 144(1), pages 268-280.
    10. Mathur, Puneet Prakash & Shah, Janat, 2008. "Supply chain contracts with capacity investment decision: Two-way penalties for coordination," International Journal of Production Economics, Elsevier, vol. 114(1), pages 56-70, July.
    11. Li, Ying & Gupta, Sudheer, 2011. "Strategic capability investments and competition for supply contracts," European Journal of Operational Research, Elsevier, vol. 214(2), pages 273-283, October.
    12. Wu, Zhengping & Crama, Pascale & Zhu, Wanshan, 2012. "The newsvendor’s optimal incentive contracts for multiple advertisers," European Journal of Operational Research, Elsevier, vol. 220(1), pages 171-181.
    13. Choi, Tsan-Ming & Sethi, Suresh, 2010. "Innovative quick response programs: A review," International Journal of Production Economics, Elsevier, vol. 127(1), pages 1-12, September.
    14. Shen, Yuelin & Willems, Sean P., 2012. "Coordinating a channel with asymmetric cost information and the manufacturer's optimality," International Journal of Production Economics, Elsevier, vol. 135(1), pages 125-135.

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