Supplier Competition and Cost Reduction with Endogenous Information Asymmetry

2020 ◽  
Vol 22 (5) ◽  
pp. 996-1010
Author(s):  
Cuihong Li
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Cost Reduction ◽  
Mixed Strategy ◽  
Pure Strategy ◽  
Problem Definition ◽  
Optimal Size ◽  
Strategy Equilibrium ◽  
Endogenous Information ◽  
The Impact

Problem definition: We consider a buyer sourcing from multiple competing suppliers who exert cost-reduction efforts before procurement contracts are awarded. Academic/practical relevance: The supply chain is subject to the classic hold-up problem—as the lack of a contract commitment hinders suppliers’ incentives to make investment upfront—complicated with supplier competition. Methodology: With deterministic cost-reduction outcomes, suppliers will not exert any effort if this effort is observable, and a pure-strategy equilibrium does not exist if the effort is unobservable. We analyze the mixed-strategy equilibrium with unobservable supplier effort, in which suppliers randomize their efforts and the buyer designs an optimal procurement mechanism. Results: We show that the optimal procurement mechanism can be implemented by a conventional single-price reverse auction with a random reserve price. The mixed strategy of supplier effort generates endogenous information asymmetry on supplier costs that provides suppliers with information rent, which sustains their efforts. The endogenous information asymmetry improves effort efficiency (by inducing positive supplier effort), yet introduces trade inefficiency (by causing the possible failure of trade between the parties). Although increasing supplier competition (measured by the number of suppliers) hurts the effort efficiency, it improves trade efficiency. As a result, the buyer is always better off introducing supplier competition by including more than one supplier in the supply base. However, the desired supply base size (number of suppliers) depends on the product revenue: For high-margin goods, the optimal size is achieved with two suppliers, whereas for low-margin goods, a larger supply base is better for the buyer. We show that the result based on deterministic cost reduction can be established as a limit of the case when uncertainty in cost reduction exists and shrinks to null. Managerial implications: Our study helps to understand the impact of supplier competition when supply-chain parties deliberately make their actions unpredictable to avoid being held up. The findings provide managerial guidance on procurement auction and supply base designs.

Implications of Price Matching in Supply Chain Negotiation

2021 ◽  
Author(s):  
Weixin Shang ◽  
Gangshu (George) Cai
Keyword(s):  
Supply Chain ◽  
Social Welfare ◽  
Wholesale Price ◽  
Consumer Welfare ◽  
Problem Definition ◽  
Nash Bargaining ◽  
Price Matching ◽  
The Impact ◽  
Multiple Buyers ◽  
Wholesale Pricing

Problem definition: Few papers have explored the impact of price matching negotiation (PM), in which a channel matches its price with the resulting wholesale price bargained by another channel, on firms’ performances, consumer welfare, and social welfare, with and without supply chain coordination. Academic/practical relevance: Negotiation has been widely seen in determining both uniform and discriminatory wholesale prices, which affect outcomes of competitive supply chain practices. Methodology: To characterize the PM mechanism, we use game theory and Nash bargaining theory to compare PM with simultaneous negotiation (SN) through a common-seller two-buyer differentiated Bertrand competition model. Results: Our analysis reveals that PM can benefit the seller but hurt all buyers, which is at odds with some fair wholesale pricing clauses intending to protect buyers. Under coordination with side payments, however, all firms can conditionally benefit more from PM than from SN. Despite firms’ gains, PM leads to less consumer utility and social welfare compared with SN, unless the second buyer in PM is considerably less powerful than the first buyer. Coordination further worsens PM’s negative impact on consumer utility and social welfare. Moreover, the existence of a spot market can increase the wholesale price in PM, hurting buyers, consumers, and society. Furthermore, the qualitative results about PM remain robust under an alternative disagreement point for PM, multiple buyers, and other extensions. Managerial implications: This paper delivers insights on when price matching in supply chain wholesale price negotiation can benefit a seller, buyers, consumers, and society in a variety of scenarios. It advocates how managers can use PM to their own advantages and provides rationale to decision makers for policy regulations regarding wholesale pricing.

Supply Chain Coordination for E-Commerce: Risk Penalty vs. Flat Rate

2021 ◽  
Author(s):  
Ju Myung Song ◽  
Yao Zhao
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Risk Sharing ◽  
Supply Chain Coordination ◽  
Wholesale Price ◽  
Problem Definition ◽  
Third Party ◽  
Common Belief ◽  
Shipping Industry ◽  
Flat Rate

Problem definition: We study the coordination of an E-commerce supply chain between online sellers and third party shippers to meet random demand surges, induced by, for instance, online shopping holidays. Academic/practical relevance: Motivated by the challenge of meeting the unpredictable demand surges in E-commerce, we study shipping contracts and supply chain coordination between online sellers and third party shippers in a novel model taking into account the unique features of the shipping industry. Methodology: We compare two shipping contracts: the risk penalty (proposed by UPS) and the flat rate (used by FedEx), and analyze their impact on the seller, the shipper, and the supply chain. Results: Under information symmetry, the sophisticated risk penalty contract is no better than the simple flat rate contract for the shipper, against common belief. Although both the risk penalty and the flat rate can coordinate the supply chain, the risk penalty does so only if the shipper makes zero profit, but the flat rate can provide a positive profit for both. These results represent a new form of double marginalization and risk-sharing, in sharp contrast to the well-known literature on the classic supplier-retailer supply chain, where risk-sharing contracts (similar to the risk penalty) can bring benefits to all parties, but the single wholesale price contract (similar to the flat rate) can achieve supply chain coordination only when the supplier makes zero profit. We also find that only the online seller, but not the shipper, has the motivation to vertically integrate the seller-shipper supply chain. Under information asymmetry, however, the risk penalty brings more benefit to the shipper than the flat rate, but hurts the seller and the supply chain. Managerial implications: Our results imply that information plays an important role in the shipper’s choices of shipping contracts. Under information symmetry, the risk penalty is unnecessarily complex because the simple flat rate is as good as the risk penalty for the shipper; moreover, it is better for the seller-shipper coordination. However, under information asymmetry, the shipper faces additional shipping risk that can be offset by the extra flexibility of the risk penalty. Our study also explains and supports the recent practice of online sellers (e.g., Amazon.com and JD.com), but not shippers, to vertically integrate the supply chain by consistently expanding their shipping capabilities.

scholarly journals Bundling and Competition for Slots

2012 ◽  
Vol 102 (5) ◽  
pp. 1957-1985 ◽  
Author(s):  
Doh-Shin Jeon ◽  
Domenico Menicucci
Keyword(s):  
Marginal Cost ◽  
Mixed Strategy ◽  
Pure Strategy ◽  
Policy Implications ◽  
Digital Goods ◽  
Efficient Technology ◽  
Pure Strategy Equilibrium ◽  
Clear Cut ◽  
Mixed Strategy Equilibrium ◽  
Strategy Equilibrium

We consider competition between sellers selling multiple distinct products to a buyer having k slots. Under independent pricing, a pure strategy equilibrium often does not exist, and equilibrium in mixed strategy is never efficient. When bundling is allowed, each seller has an incentive to bundle his products, and an efficient “technology-renting” equilibrium always exists. Furthermore, in the case of digital goods or when sales below marginal cost are banned, all equilibria are efficient. Comparing the mixed-strategy equilibrium with the technology-renting equilibrium reveals that bundling often increases the buyer's surplus. Finally, we derive clear-cut policy implications.(JEL D43, D86, K21, L13, L14, L41, L82)

On the Foundations of Nash Equilibrium

1996 ◽  
Vol 12 (1) ◽  
pp. 67-88 ◽  
Author(s):  
Hans Jørgen Jacobsen
Keyword(s):  
Game Theory ◽  
Nash Equilibrium ◽  
Cooperative Game Theory ◽  
Mixed Strategy ◽  
Pure Strategy ◽  
Mixed Strategies ◽  
Positive Theory ◽  
Equilibrium Concept ◽  
Strategy Equilibrium ◽  
Pure Strategies

The most important analytical tool in non-cooperative game theory is the concept of a Nash equilibrium, which is a collection of possibly mixed strategies, one for each player, with the property that each player's strategy is a best reply to the strategies of the other players. If we do not go into normative game theory, which concerns itself with the recommendation of strategies, and focus instead entirely on the positive theory of prediction, two alternative interpretations of the Nash equilibrium concept are predominantly available.In the more traditional one, a Nash equilibrium is a prediction of actual play. A game may not have a Nash equilibrium in pure strategies, and a mixed strategy equilibrium may be difficult to incorporate into this interpretation if it involves the idea of actual randomization over equally good pure strategies. In another interpretation originating from Harsanyi (1973a), see also Rubinstein (1991), and Aumann and Brandenburger (1991), a Nash equilibrium is a ‘consistent’ collection of probabilistic expectations, conjectures, on the players. It is consistent in the sense that for each player each pure strategy, which has positive probability according to the conjecture about that player, is indeed a best reply to the conjectures about others.

Sharing Manufacturer’s Demand Information in a Supply Chain with Price and Service Effort Competition

2021 ◽  
Author(s):  
Yunjie Wang ◽  
Albert Y. Ha ◽  
Shilu Tong
Keyword(s):  
Supply Chain ◽  
Wholesale Price ◽  
Problem Definition ◽  
Theoretic Model ◽  
Price Distortion ◽  
Demand Information ◽  
Private Demand ◽  
The Cost ◽  
The Impact ◽  
Share Information

Problem definition: This paper investigates the issue of sharing the private demand information of a manufacturer that sells a product to retailers competing on prices and service efforts. Academic/practical relevance: In the existing literature, which ignores service effort competition, it is known that demand signaling induces an informed manufacturer to distort the wholesale price downward, which benefits the retailers, and so, they do not have any incentive to receive the manufacturer’s private information. In practice, many manufacturers share demand information with their retailers that compete on prices and service efforts (e.g., demand-enhancing retail activities), a setting that has not received much attention from the literature. Methodology: We develop a game-theoretic model with one manufacturer selling to two competing retailers and solve for the equilibrium of the game. Results: We show how an informed manufacturer may distort the wholesale price upward or downward to signal demand information to the retailers, depending on the cost of service effort, the intensity of effort competition, and the number of uninformed retailers. We fully characterize the impact of such wholesale price distortion on the firms’ incentive to share information and derive the conditions under which the manufacturer shares information with none, one, or both of the retailers. We derive conditions under which a higher cost of service effort makes the retailers or the manufacturer better off. Managerial implications: Our results provide novel insights about how service effort competition impacts the incentives for firms in a supply chain to share a manufacturer’s private demand information. For instance, when the cost of effort is high or service effort competition is intense, a manufacturer should share information with none or some, but not all, of the retailers.

Equilibrium Analysis of Dual-Channel Supply Chain Under Retailer's Greening Cost Information Asymmetry

2020 ◽  
Vol 13 (4) ◽  
pp. 1-22
Author(s):  
Rofin T. M. ◽  
Biswajit Mahanty
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Complete Information ◽  
Equilibrium Analysis ◽  
Theoretic Model ◽  
Cost Information ◽  
Dual Channel ◽  
Game Theoretic ◽  
Dual Channel Supply Chain ◽  
The Impact

The purpose of this study is to investigate the impact of information asymmetry of retailer's greening cost on the performance of both the manufacturer and the retailer. The study considers a dual-channel supply chain comprising of a manufacturer and a retailer committed to green operations. The authors have employed sequential game theoretic model to derive the closed form expressions corresponding to the two cases under consideration, that is: (1) complete information and (2) asymmetric information. They have found that the sharing of greening cost information by the retailer can make both the manufacturer and the retailer better off in terms of profit. They have also found that the greening cost information sharing is all the more important when the greening cost efficiency is weak. The study helps retail managers to make a decision on whether to conceal or reveal the greening cost information with the upstream manufacturer.

A neoteric approach to geometric shipment policy in an integrated supply chain with setup cost reduction and freight cost using service level constraint

2020 ◽  
Vol 54 (3) ◽  
pp. 653-673
Author(s):  
Selvaraj Hemapriya ◽  
Ramasamy Uthayakumar
Keyword(s):  
Supply Chain ◽  
Cost Reduction ◽  
Transportation Cost ◽  
Service Level ◽  
Setup Cost ◽  
Transportation Modes ◽  
Controllable Lead Time ◽  
Integrated Supply Chain ◽  
The Impact ◽  
Setup Cost Reduction

This paper explores a neoteric approach to geometric shipment policy and concerns the impact of controllable lead time, setup cost reduction, lost sales caused by stock-out and freight cost within an integrated vendor–buyer supply chain configuration using service-level constraint. In particular, the transportation cost is a function of shipping weight, distance and transportation modes. In other words, truckload (TL) and less-than-truckload (LTL) shipments. A heuristic model is developed to minimize the joint expected total cost (JETC), when the mode of transportation is limited to TL and LTL shipments. Numerical examples including the sensitivity analysis with some managerial insights of system parameters is implemented to endorse the outcome of the supply chain models.

Cash Hedging in a Supply Chain

2019 ◽  
Vol 65 (8) ◽  
pp. 3928-3947 ◽  
Author(s):  
Panos Kouvelis ◽  
Xiaole Wu ◽  
Yixuan Xiao
Keyword(s):  
Supply Chain ◽  
Cash Flow ◽  
Cost Reduction ◽  
Cash Flows ◽  
Market Size ◽  
Flexibility Effect ◽  
Internal Funds ◽  
Cash Flow Volatility ◽  
The Cost ◽  
The Impact

We study hedging cash-flow risks in a supply chain where firms invest internal funds to improve production efficiencies. We offer a decomposition framework to capture the cost-reduction and flexibility effect of hedging. It allows us to understand how a firm’s hedging choice depends on its supply chain partner’s decision, and how such interaction is affected by supply chain characteristics such as market size, cash-flow volatility, and correlation. When firms’ cash flows are independent of each other, they are more likely to hedge with a larger market size. When cash flows are correlated, the impact of market size and volatility on firms’ hedging decisions presents multiple patterns, contingent on whether their risks amplify or offset each other. This paper was accepted by Gustavo Manso, finance.

Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

2021 ◽  
Author(s):  
Brent B. Moritz ◽  
Arunachalam Narayanan ◽  
Chris Parker
Keyword(s):  
Supply Chain ◽  
Information Sharing ◽  
Human Behavior ◽  
Bullwhip Effect ◽  
Problem Definition ◽  
Supply Chain Costs ◽  
Cost Impact ◽  
Managerial Implications ◽  
The Cost ◽  
The Impact

Problem definition: We study the bullwhip effect and analyze the impact of human behavior. We separate rational ordering in response to increasing incoming orders from irrational ordering. Academic/practical relevance: Prior research has shown that the bullwhip effect occurs in about two-thirds of firms and impacts profitability by 10%–30%. Most bullwhip mitigation efforts emphasize processes such as information sharing, collaboration, and coordination. Previous work has not been able to separate the impact of behavioral ordering from rational increases in order quantities. Methodology: Using data from a laboratory experiment, we estimate behavioral parameters from three ordering models. We use a simulation to evaluate the cost impact of bullwhip behavior on the supply chain and by echelon. Results: We find that cost increases are not equally shared. Human biases (behavioral ordering) at the retailer results in higher relative costs elsewhere in the supply chain, even as similar ordering by a wholesaler, distributor, or factory results in increased costs within that echelon. These results are consistent regardless of the behavioral models that we consider. The cognitive profile of the decision maker impacts both echelon and supply chain costs. We show that the cost impact is higher as more decision makers enter a supply chain. Managerial implications: The cost of behavioral ordering is not consistent across the supply chain. Managers can use the estimation/simulation framework to analyze the impact of human behavior in their supply chains and evaluate improvement efforts such as coordination or information sharing. Our results show that behavioral ordering by a retailer has an out-sized impact on supply chain costs, which suggests that upstream echelons are better placed to make forecasting and replenishment decisions.

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