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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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    Cited by:

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    6. Qin, Xuwei & Shao, Lusheng & Jiang, Zhong-Zhong, 2020. "Contract design for equipment after-sales service with business interruption insurance," European Journal of Operational Research, Elsevier, vol. 284(1), pages 176-187.
    7. Mohammed Alkahtani, 2022. "Mathematical Modelling of Inventory and Process Outsourcing for Optimization of Supply Chain Management," Mathematics, MDPI, vol. 10(7), pages 1-27, April.
    8. Li, Zhaolin & Ryan, Jennifer K. & Sun, Daewon, 2015. "Multi-attribute procurement contracts," International Journal of Production Economics, Elsevier, vol. 159(C), pages 137-146.
    9. Jain, Tarun & Hazra, Jishnu & Cheng, T.C.E., 2018. "Sourcing under overconfident buyer and suppliers," International Journal of Production Economics, Elsevier, vol. 206(C), pages 93-109.
    10. Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
    11. Xu, Xiaoyan & Cheng, Xiaoying & Sun, Yanhong, 2015. "Coordination contracts for outsourcing supply chain with financial constraint," International Journal of Production Economics, Elsevier, vol. 162(C), pages 134-142.
    12. Zhuzhu Song & Wansheng Tang & Ruiqing Zhao, 2022. "Implications of economies of scale and scope for round-trip shipping canvassing with empty container repositioning," Annals of Operations Research, Springer, vol. 309(2), pages 485-515, February.
    13. Lou, Yaqi & Feng, Lipan & He, Shuguang & He, Zhen & Zhao, Xiukun, 2020. "Logistics service outsourcing choices in a retailer-led supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 141(C).
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    15. Huang, Min & Tu, Jun & Chao, Xiuli & Jin, Delong, 2019. "Quality risk in logistics outsourcing: A fourth party logistics perspective," European Journal of Operational Research, Elsevier, vol. 276(3), pages 855-879.
    16. Houyuan Jiang & Zhan Pang & Sergei Savin, 2017. "Improving Patient Access to Care: Performance Incentives and Competition in Healthcare Markets," Working Papers 2017/01, Cambridge Judge Business School, University of Cambridge.
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    19. Pan, Jeh-Nan & Nguyen, Hung Thi Ngoc, 2015. "Achieving customer satisfaction through product–service systems," European Journal of Operational Research, Elsevier, vol. 247(1), pages 179-190.

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