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Two-echelon supply chain coordination under information asymmetry with multiple types

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  • Kerkkamp, R.B.O.
  • van den Heuvel, W.
  • Wagelmans, A.P.M.

Abstract

We analyse a principal-agent contracting model with asymmetric information between a supplier and a retailer. Both the supplier and the retailer have the classical non-linear economic ordering cost functions consisting of ordering and holding costs. We assume that the retailer has the market power to enforce any order quantity. Furthermore, the retailer has private holding costs. The supplier wants to minimise his expected costs by offering a menu of contracts with side payments as an incentive mechanism. We consider a general number of discrete single-dimensional retailer types with type-dependent default options. A natural and common model formulation is non-convex, but we present an equivalent convex formulation. Hence, the contracting model can be solved efficiently for a general number of retailer types. We also derive structural properties of the optimal menu of contracts. In particular, we completely characterise the optimum for two retailer types and provide a minimal list of candidate contracts for three types. Finally, we prove a sufficient condition to guarantee unique contracts in the optimal solution for a general number of retailer types.

Suggested Citation

  • Kerkkamp, R.B.O. & van den Heuvel, W. & Wagelmans, A.P.M., 2016. "Two-echelon supply chain coordination under information asymmetry with multiple types," Econometric Institute Research Papers EI-2016-18, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:80104
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    References listed on IDEAS

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    Cited by:

    1. Kerkkamp, R.B.O. & van den Heuvel, W. & Wagelmans, A.P.M., 2019. "Two-echelon lot-sizing with asymmetric information and continuous type space," Omega, Elsevier, vol. 87(C), pages 158-176.
    2. Matsui, Kenji, 2019. "A supply chain member should set its margin later if another member's cost is highly uncertain," European Journal of Operational Research, Elsevier, vol. 275(1), pages 127-138.

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    Keywords

    economic order quantity; mechanism design; asymmetric information; hidden convexity;
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