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Pricing Games and Impact of Private Demand Information in Decentralized Assembly Systems

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  • Başak Kalkancı

    (Engineering Systems Division, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Feryal Erhun

    (Management Science and Engineering Department, Stanford University, Stanford, California 94305)

Abstract

This paper analyzes decentralized assembly systems under asymmetric demand information and sequential contracting. We reveal new insights on the value of contract type (price-only versus complex), demand information (complete versus asymmetric), and contract sequence (first mover versus second mover) to different players. Our results for the basic model show the following: (1) Complex contracts increase the suppliers' aggregate profit; however, individual suppliers do not necessarily benefit from a complex contracting equilibrium. We identify the conditions under which each supplier benefits from such an equilibrium. (2) Eliminating information asymmetry is not always beneficial for the suppliers because obtaining information might bring only marginal value and hence might not be realistically justified. Furthermore, a downstream supplier might prefer information asymmetry to complete information, especially when demand variability is moderate. (3) Unless there is a high demand risk, the first-mover advantage is prevalent when the assembler is a price-taker.We extend our basic model to analyze two additional scenarios. First, we study cases where the suppliers may offer contracts of different complexity. Beyond enriching our understanding of contract choice in decentralized assembly systems, such variations enhance the analysis beyond the standard methodology of principal-agent models and utilize solution techniques from optimal control. Second, we analyze the situation where the suppliers may possess different levels of information on demand under complex contracts. We show that an upstream supplier always benefits from a downstream supplier's superior information. However, the additional information might decrease the downstream supplier's profit, especially when the forecast variability is low compared to the total demand variability in the system. Our results for the basic model and its extensions confirm that studying interactions between suppliers, specifically under different contract types and information structures, in assembly systems presents rich opportunities for future research.

Suggested Citation

  • Başak Kalkancı & Feryal Erhun, 2012. "Pricing Games and Impact of Private Demand Information in Decentralized Assembly Systems," Operations Research, INFORMS, vol. 60(5), pages 1142-1156, October.
    • Handle: RePEc:inm:oropre:v:60:y:2012:i:5:p:1142-1156
    DOI: 10.1287/opre.1120.1084
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    Cited by:

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    3. Yulan Wang & Baozhuang Niu & Pengfei Guo & Jing-Sheng Song, 2021. "Direct Sourcing or Agent Sourcing? Contract Negotiation in Procurement Outsourcing," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 294-310, March.
    4. Hong Fu & Yongkai Ma & Debing Ni & Xiaoqiang Cai, 2017. "Coordinating a decentralized hybrid push–pull assembly system with unreliable supply and uncertain demand," Annals of Operations Research, Springer, vol. 257(1), pages 537-557, October.
    5. Andrew M. Davis & Bin Hu & Kyle Hyndman & Anyan Qi, 2022. "Procurement for Assembly Under Asymmetric Information: Theory and Evidence," Management Science, INFORMS, vol. 68(4), pages 2694-2713, April.
    6. Baiyun Yuan & Bingmei Gu & Jin Guo & Liangjie Xia & Chunming Xu, 2018. "The Optimal Decisions for a Sustainable Supply Chain with Carbon Information Asymmetry under Cap-and-Trade," Sustainability, MDPI, vol. 10(4), pages 1-17, March.
    7. Lv, Fei & Xiao, Lei & Xu, Minghui & Guan, Xu, 2019. "Quantity-payment versus two-part tariff contracts in an assembly system with asymmetric cost information," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 129(C), pages 60-80.
    8. Fu, Hong & Ma, Yongkai & Cai, Xiaoqiang, 2018. "Downstream firm’s investment with equity holding in decentralized assembly systems," Omega, Elsevier, vol. 75(C), pages 27-56.
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    10. Aadhaar Chaturvedi, 2023. "Contracting with multiple suppliers: A multi‐item buyer's make versus buy decision," Production and Operations Management, Production and Operations Management Society, vol. 32(2), pages 434-448, February.
    11. Zhisong Chen & Jianhui Peng, 2022. "Should the assembly system with direct omnichannel introduce integrated management service? A game-theoretical modelling study," Electronic Commerce Research, Springer, vol. 22(4), pages 1307-1350, December.
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