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The implication of capacity reservation contracts in assembly system with asymmetric demand information

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  • Fei Lv
  • Shihua Ma
  • Xu Guan

Abstract

This paper investigates an assembly system that consists of one assembler and two suppliers who produce complementary components. The assembler possesses some private demand information that is unobservable to the upstream suppliers, and the two suppliers have to choose their capacity reservations ahead of the selling season. To induce credible vertical information sharing, we design three capacity reservation contracts: the price-quantity contract, the price-only contract and the hybrid price-quantity and price-only contract, so as to identify how the firms’ equilibrium reservation strategies and pay-offs react under different contract schemes. The results show that the assembler obtains the highest pay-off under either the price-only contract or the hybrid contract, which is determined by whether the private demand information or the demand fluctuation is sufficiently high. The suppliers’ optimal contract types are further influenced by their decision sequence. In particular, the supplier who makes decision earlier prefers the hybrid contract, while the supplier who makes decision later prefers any of the three contracts. The supply chain generates the highest pay-off from either the price-quantity contract or the hybrid contract.

Suggested Citation

  • Fei Lv & Shihua Ma & Xu Guan, 2015. "The implication of capacity reservation contracts in assembly system with asymmetric demand information," International Journal of Production Research, Taylor & Francis Journals, vol. 53(18), pages 5564-5591, September.
    • Handle: RePEc:taf:tprsxx:v:53:y:2015:i:18:p:5564-5591
    DOI: 10.1080/00207543.2015.1036150
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    Cited by:

    1. Onur Kaya & Serra Caner, 2018. "Supply chain contracts for capacity decisions under symmetric and asymmetric information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 67-92, March.
    2. Guo Li & Hui Mao & Lei Xiao, 2017. "Impacts of Leader–Follower Structure on Pricing and Production Strategies in a Decentralized Assembly System," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(01), pages 1-24, February.
    3. Yin, Zhe & Wang, Chen & Yin, Qian, 2018. "Coordinating overseas and local sourcing through a capacitated expediting transportation policy," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 258-271.
    4. He, Juan & Ma, Chao & Pan, Kai, 2017. "Capacity investment in supply chain with risk averse supplier under risk diversification contract," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 106(C), pages 255-275.
    5. Shafiq, Muhammad & Savino, Matteo M., 2019. "Supply chain coordination to optimize manufacturer's capacity procurement decisions through a new commitment-based model with penalty and revenue-sharing," International Journal of Production Economics, Elsevier, vol. 208(C), pages 512-528.
    6. Guo Li & Lin Li & Mengqi Liu & Suresh P. Sethi, 2020. "Impact of power structures in a subcontracting assembly system," Annals of Operations Research, Springer, vol. 291(1), pages 475-498, August.
    7. Jiang, Zhong-Zhong & He, Na & Huang, Song, 2021. "Government penalty provision and contracting with asymmetric quality information in a bioenergy supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 154(C).

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