Contract design under asymmetric demand information for sustainable supply chain practices

Emerging smart technology spawns many start-up firms, which enter into the market and bring more instability and uncertainty to supply chains. This paper develops a game-theoretic model which captures the most crucial factors in market entry stage, such as market uncertainty, competition, contract design, distribution channel, and sustainability. We consider a supply chain consisting of one supplier and two retailers (an incumbent and an entrant). We assume that the incumbent first enters a market and possesses private information about market demand. The entrant encroaches upon the market after observing its big growth potentials. In this paper, we study how the supplier optimally designs the contract for the retailers under asymmetric information to make the supply chain more efficient and sustainable. Subsequently, we investigate the preference of contractual forms between a franchise contract (FC) and a two-part tariff contract (TTC), from the perspectives of the supplier, the incumbent retailer, and the whole supply chain, respectively. It turns out that the supplier prefers the TTC while the incumbent is better off under the FC when the demand variation is relatively high. In addition, we find that the TTC is beneficial to the whole supply chain in most cases. In other words, TTC can promote the coordination of the supply chain and realize the sustainable development of the supply chain. We further analyze the impact of the entrant entry on the supplier’s contract design for the incumbent. The supplier tends to charge the lower wholesale price and less franchise fee for the incumbent after the entrant entry. The supplier’s contract strategy is conducive to maintaining the horizontal competition and promoting the sustainability of the supply chain. We also analyze the supplier’s distribution channel decision and find that she is more willing to block the entrant from entering the market in most cases because the incumbent with the private demand information makes the supply chain more efficient. Finally, we also extend our results by altering some assumption in the basic model.