IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v25y2023i5p1835-1854.html
   My bibliography  Save this article

Optimal Contract Design for a National Brand Manufacturer Under Store Brand Private Information

Author

Listed:
  • Xinyan Cao

    (College of Business, Northern Illinois University, DeKalb, Illinois 60115)

  • Xiang Fang

    (Business School, University of Colorado Denver, Denver, Colorado 80202)

  • Guang Xiao

    (Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Hong Kong 999077, China)

  • Nan Yang

    (Miami Herbert Business School, University of Miami, Coral Gables, Florida 33146)

Abstract

Problem definition : We study an optimal contract design problem for a national brand (NB) manufacturer, which sells her product via a retailer. The retailer may introduce his store brand (SB) with private cost information. The manufacturer estimates that the retailer’s SB cost may be high or low with certain probabilities and offers a menu of two-part tariff contracts to screen the retailer’s cost information. Methodology/results : Following the mechanism design theory, we formulate the problem as a two-stage screening game to analyze the strategic interaction between the two players under asymmetric information. Despite the complexity resulting from type-dependent reservation profit of the retailer, we derive the NB manufacturer’s optimal contracts analytically. We prove that there exists a unique threshold such that when the NB cost is below the threshold, the manufacturer offers both types of retailers incentive-compatible contracts; when the NB cost is above the threshold, the manufacturer offers a menu of contracts to shut down the low-type retailer and engage the high-type retailer only. Managerial implications : We find that when the NB product becomes more competitive (i.e., a higher quality or a lower cost), both the NB manufacturer and the retailer are better off. This result implies that under asymmetric information, the retailer has incentive to enhance the NB product quality or reduce its cost. Additionally, the private information is valuable to both members only when a contract without shutdown is offered. Moreover, such information is more valuable to both players when the NB product becomes more competitive. However, when SB quality improves or when SB cost decreases, the value of information may increase or decrease to both supply chain members. Finally, we derive a surprising result that under asymmetric information, the expected consumer surplus may increase because of a lower SB quality or a higher low-type SB cost.

Suggested Citation

  • Xinyan Cao & Xiang Fang & Guang Xiao & Nan Yang, 2023. "Optimal Contract Design for a National Brand Manufacturer Under Store Brand Private Information," Manufacturing & Service Operations Management, INFORMS, vol. 25(5), pages 1835-1854, September.
    • Handle: RePEc:inm:ormsom:v:25:y:2023:i:5:p:1835-1854
    DOI: 10.1287/msom.2021.0187
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.2021.0187
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.2021.0187?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cai, Jianhu & Cao, Zhengang & Shang, Jennifer, 2025. "Blockchain adoption in a green supply chain: Considering information asymmetry of consumers’ privacy concern," International Journal of Production Economics, Elsevier, vol. 279(C).
    2. Luo, Yuanyuan & Sun, Xiaojie & Yue, Xiaohang, 2024. "Store brand entry with asymmetric cost information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 192(C).
    3. Meng, Mingyou & Deng, Shiming & Zhou, Pin & Xu, He, 2025. "The role of dual purpose in retailer’s store brand introduction and quality strategies within a supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 194(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:25:y:2023:i:5:p:1835-1854. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.