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Designing Supply Contracts: Contract Type and Information Asymmetry

Author

Listed:
  • Charles J. Corbett

    (The Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza, Los Angeles, California 90095-1481)

  • Deming Zhou

    (The Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza, Los Angeles, California 90095-1481)

  • Christopher S. Tang

    (The Anderson School of Management, University of California, Los Angeles, 110 Westwood Plaza, Los Angeles, California 90095-1481)

Abstract

This paper studies the value to a supplier of obtaining better information about a buyer's cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part linear schemes, and twopart nonlinear schemes), each under full and incomplete information about the buyer's cost structure. We allow both sides to refuse to trade by explicitly including reservation profit levels for both; for the supplier, this is implemented through a cutoff policy. We derive the supplier's optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts. Our key findings are as follows: First, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, the proportion of buyers the supplier will choose to exclude can be substantial.

Suggested Citation

  • Charles J. Corbett & Deming Zhou & Christopher S. Tang, 2004. "Designing Supply Contracts: Contract Type and Information Asymmetry," Management Science, INFORMS, vol. 50(4), pages 550-559, April.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:4:p:550-559
    DOI: 10.1287/mnsc.1030.0173
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    References listed on IDEAS

    as
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