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Asymmetric Information and Economies of Scale in Service Contracting

Author

Listed:
  • Mustafa Akan

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Bar{i}c{s} Ata

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • Martin A. Lariviere

    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

Abstract

We consider outsourcing in two important service settings: call center and order fulfillment operations. An important factor in both is the inherent economies of scale. Therefore, we advance a unifying model covering both applications and study the associated contracting problem under information asymmetry. At the time of contracting, the outsourcing firm, "the originator," faces uncertainty regarding the demand volume but has private information about its probability distribution. The true demand is quickly observed once the service commences. The service provider invests in capacity before the start of the operation and offers a menu of contracts to screen different types of the originator. Adopting a mechanism design approach, we prove that a menu of two-part tariffs achieves the full-information solution. Hence, it is optimal among all possible contracts (in both settings) because of economies of scale and contractibility of realized demand.

Suggested Citation

  • Mustafa Akan & Bar{i}c{s} Ata & Martin A. Lariviere, 2011. "Asymmetric Information and Economies of Scale in Service Contracting," Manufacturing & Service Operations Management, INFORMS, vol. 13(1), pages 58-72, September.
    • Handle: RePEc:inm:ormsom:v:13:y:2011:i:1:p:58-72
    DOI: 10.1287/msom.1100.0303
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    References listed on IDEAS

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