Optimal Contract Under Asymmetric Information About Fairness

2021 ◽  
Author(s):  
Valery Pavlov ◽  
Elena Katok ◽  
Wen Zhang
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Incomplete Information ◽  
Private Information ◽  
Problem Definition ◽  
Empirical Literature ◽  
Common Finding ◽  
Supply Chain Performance ◽  
Optimal Mechanism ◽  
Wide Range

Problem definition: To improve the poor performance of supply chains caused by misaligned incentives under the wholesale price contract, theory proposes coordinating contracts. However, a common finding of experimental studies testing such contracts is that they tend to yield only a marginal, if any, performance improvement over wholesale pricing. These studies identify several behavioral factors that are at play but none accounted for by the theory proposing coordinating contracts. Among them, identified as the single most detrimental for the supply chain performance, is incomplete information about preferences for fairness causing contract rejections. Can the supply chain performance be improved with a contract designed allowing for this type of information asymmetry? What does this contract (mechanism) look like? Academic/practical relevance: The extant research characterized the optimal contracting mechanisms for such important practical cases as the suppliers’ private information about production cost or the retailers’ private information about the end customer demand. The present study addresses the gap in another important practical case: when the source of information asymmetry is the private information about preferences for fairness. Methodology: The underlying research method is mechanism design. Results: We prove that the optimal mechanism consists of a single contract positioned on the Pareto frontier and characterize the optimal profit split between the supplier and the retailer. We show that, under a wide range of preferences for fairness, the efficiency loss because of private information is strictly positive, but exceptions are possible. We also show that the optimal mechanism can be implemented with a variety of commonly used in practice and widely studied in academic literature contracts, including the minimum order quantity and the two-part tariff ones. Managerial implications: We establish a direct link between a large volume of theoretical and empirical literature on social preferences with the research on supply chain contracts. Because rejections that are because of incomplete information are an important cause of contract inefficiency observed in the laboratory, managers should avoid take it or leave it offers when they negotiate contracts. Instead, the bargaining process should be geared toward discovering the extent of the fairness preferences of the contracting parties.

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.

Private Information and Dynamic Bargaining in Supply Chains: An Experimental Study

2020 ◽  
Author(s):  
Andrew M. Davis ◽  
Kyle Hyndman
Keyword(s):  
Supply Chain ◽  
Private Information ◽  
Human Subjects ◽  
Problem Definition ◽  
Bargaining Solution ◽  
Additional Experiment ◽  
Cost Information ◽  
Private Cost ◽  
Managerial Implications ◽  
Verifiable Disclosure

Problem definition: We conduct a controlled human-subjects experiment in a two-tier supply chain where a supplier’s per-unit production cost may be private information while bargaining with a buyer. Academic/practical relevance: Academically, supply chain studies often assume full-information or highly structured bargaining. We consider private information with dynamic, unstructured bargaining. In practice, a buyer may not know its supplier’s cost exactly and interact with its supplier in a back-and-forth bargaining environment. Thus, understanding how a supplier’s private cost information affects both supply chain outcomes and bargaining is new to the literature and relevant to practice. Methodology: We employ insights from mechanism design to generate restrictions on the space of agreements and solve for a specific bargaining solution under private information to generate precise predictions. These predictions are then tested through a human-subjects experiment. Results: In our experiment, theory predicts that all supplier types should earn at least 50% of total profits when their cost information is private. However, we find that high-cost suppliers earn a disproportionately low share of total profits under private information, 20.16%. We show that this is because buyers, under private information, act as if they are bargaining with the lowest-cost supplier and suppliers do not appear to blame buyers for behaving this way. Based on these findings, we conduct an additional experiment where suppliers have the ability to communicate their private costs to buyers and observe that verifiable disclosure significantly increases profits for high-cost suppliers. Managerial implications: High-cost suppliers actually suffer from having their costs as private information, which runs counter to theory. However, if high-cost suppliers can credibly disclose their costs to buyers, they can significantly increase profits. Lastly, although private information does not lead to more disagreements, negotiations do take longer, which can be costly to firms.

scholarly journals Alleviating Financing Constraints of SMEs through Supply Chain

2019 ◽  
Vol 11 (3) ◽  
pp. 673 ◽  
Author(s):  
Yang Yang ◽  
Xuezheng Chen ◽  
Jing Gu ◽  
Hamido Fujita
Keyword(s):  
Supply Chain ◽  
Information Asymmetry ◽  
Private Information ◽  
Developing Economies ◽  
Management Strategies ◽  
External Financing ◽  
Information Structures ◽  
Developed Economies ◽  
Credit Risks ◽  
Risk Management Strategies

Small and medium-sized enterprises play a crucial role in sustaining economic development in both developed economies and developing economies, however, many of them suffer from chronic and structural difficulties in accessing external financing. In this paper, we develop a theoretical framework to illustrate how information structures work in the strategic interactions between banks and firms in a supply chain, and why the transaction information in a supply chain may serve to reduce information asymmetry and improve SMEs’ access to external financing. We find that under incomplete information, the transactions between SMEs and suppliers can serve as signals for banks, which may help banks access the private information of SMEs, thus reducing information asymmetry between them. To maximize profit, banks should dynamically adjust both their interest rate policies and risk management strategies when providing financing services to SMEs, according to the structure of the financial market. The improvement of the external financial environment for SMEs may benefit the entire supply chain, thus facilitating its sustainable development and the growth of SMEs. Our framework sheds light on how SMEs in a supply chain may enhance their survivability and facilitate their development through appropriate strategies to improve business performances and manage credit risks.

scholarly journals Supply Chain Performance with Target-Oriented Firms

2021 ◽  
Author(s):  
Lucy Gongtao Chen ◽  
Qinshen Tang
Keyword(s):  
Supply Chain ◽  
Wholesale Price ◽  
Strong Support ◽  
Problem Definition ◽  
Expected Profit ◽  
Trading Partner ◽  
Supply Chain Performance ◽  
Decentralized System ◽  
Outside Option ◽  
Risk Neutral

Problem definition: We study a supply chain in which a supplier sets the wholesale price and a retailer responds with an order quantity. Both of the two firms can be either risk-neutral—maximizing the expected profit—or target-oriented, which is to maximize her or his ability to reach a target profit. Academic/practical relevance: Our work not only sheds light on the benefit/loss of trading with target-oriented decision makers but also, adds new knowledge to the supply chain coordination literature. Methodology: We provide strong support for firms’ target-based preference and the linear target formation model through a survey as well as analyzing company data. With the firms’ target-oriented behavior evaluated by a CVaR-satisficing measure, we apply a game theoretical framework to investigate how the target-based preference affects supply chain performance. Results: A firm, be it a supplier or a retailer, is always hurt by its target-based preference but can benefit from its trading partner’s target-based preference. A risk-neutral supplier, for example, can sometimes reap the whole supply chain’s profit if the retailer is target-oriented, and a target-oriented supplier always performs better with a target-oriented retailer than a risk-neutral one. Furthermore, a target-oriented retailer and/or supplier can help alleviate the double-marginalization effect and with a specific target, can help the supply chain achieve the same efficiency level as in a risk-neutral centralized system, with just a wholesale price contract. Another important finding is that if both firms are target-oriented, then the supply chain can have a higher expected profit under a decentralized system than a centralized one. This contrasts with the case when both firms are risk-neutral. We also investigate the role of outside option and retailer-type misidentification and find that both can alleviate the retailer’s disadvantage of being target-oriented. Managerial implications: (i) The target-based preference can be exploited by the trading partner, and hence, a firm should adopt the target-oriented decision criterion with caution. (ii) A target-oriented retailer can explore strategies such as revealing his outside option or hiding his target-based preference in order to be less manipulated. (iii) Whether a firm (and the supply chain) can benefit from its trading partner’s target-based preference often depends on how ambitious the trading partner (and the firm itself if it is target-oriented) sets the target. (iv) Target-based preference of one or both firms can help the supply chain reach the first-best efficiency. (v) When both firms are target-oriented, decentralization can be preferred to centralization.

A Colored Petri Net-based modeling method for supply chain inventory management

SIMULATION ◽  
2021 ◽  
pp. 003754972110387
Author(s):  
Maria Drakaki ◽  
Panagiotis Tzionas
Keyword(s):  
Supply Chain ◽  
Inventory Management ◽  
Petri Net ◽  
Simulation Modeling ◽  
Modeling Method ◽  
Operating Conditions ◽  
Supply Chain Performance ◽  
Colored Petri Net ◽  
Wide Range ◽  
The Impact

Supply chain planning and control approaches need to include a wide range of factors in order to optimize production. Supply chain simulation modeling has been identified as a potential methodology toward increasing the efficiency of current systems to this end. The purpose of this paper is to evaluate the impact of inventory management decisions on supply chain performance using a Colored Petri Net based simulation modeling method. The presented method uses hierarchical timed Colored Petri Nets to model inventory management in a multi-stage serial supply chain, under normal operating conditions, and under the presence of disruptions, for both traditional and information sharing configurations. Disruptions are introduced as canceled orders and canceled deliveries, in a time period. Supply chain performance has been evaluated, in the context of order variance amplification and stockout amplification. Validation of the method is done by comparing results obtained for the bullwhip effect with published literature results, as well as by state space analysis results.

Supply Chain Performance in Electronics Manufacturing Industry

2014 ◽  
Vol 554 ◽  
pp. 633-637 ◽  
Author(s):  
Hasan Balfaqih ◽  
Bahisham Yunus
Keyword(s):  
Supply Chain ◽  
Supply Chain Management ◽  
Manufacturing Industry ◽  
Management Practices ◽  
Management Policy ◽  
Empirical Literature ◽  
Electronics Manufacturing ◽  
Supply Chain Performance ◽  
Chain Management ◽  
The Relationship

It is still not clear how supply chain management can be applied to enhance and improve the performance of the supply chain. Consequently, the purpose of this research is to investigate the effect of five different factors in supply chain on its performance. This research studies the relationship between the selected variables (i.e. quality, time, information, flexibility, and integration) and supply chain management performance. This research takes a step forward to better understand the relationship between supply chain management factors and supply chain performance by incorporating these variables into the industrial landscape of electronics manufacturing in Malaysia. Specifically by using a combination model of a unified framework combining SCOR Model (Supply Chain Council, 1997) and system approach model (Min &Mentzer, 2004). As such, the analysis in this study contributes to the empirical literature of supply chain management, policy progress, as well as managerial implications. The outcome of this study also signifies the contribution it has given towards a new shift in upgrading the manufacturing best practices in developing countries through effective supply chain management practices.

scholarly journals Horizontal logistics collaboration for enhanced supply chain performance: an international retail perspective

2015 ◽  
Vol 20 (6) ◽  
pp. 631-647 ◽  
Author(s):  
Vasco Sanchez Rodrigues ◽  
Irina Harris ◽  
Robert Mason
Keyword(s):  
Supply Chain ◽  
Service Providers ◽  
Third Party ◽  
Supply Chain Performance ◽  
Content Type ◽  
Distribution Costs ◽  
Logistics Service ◽  
Logistics Service Providers ◽  
Wide Range ◽  
Stage 1

Purpose – The paper aims to develop a supply chain-driven model horizontal logistics collaboration (HLC). HLC initiatives can fail. To improve the chance of success, a thorough consideration of the potential issues involved, such as seeking supply chain partners’ support, ensuring access to information/data security and assessing whether an HLC model could bring improvements to a wide range of supply chain metrics rather than reductions in distribution costs only, needs to be understood before deciding to proceed with such an initiative. Design/methodology/approach – A two-stage methodology is deployed. As part of Stage 1, a series of 20 semi-structured interviews with senior managers from retailers, retailers’ suppliers and logistics service providers were undertaken. Subsequently, in Stage 2, a focus group with practitioners from retailers and logistics service providers was run to verify the findings gathered during Stage 1. Four elements of a new HLC project being considered are investigated by supply chain champions across the UK Fast-Moving Costumer Goods industry, namely, consideration factors, required synergies, enablers and anticipated output metrics. Findings – When considering whether to embark on an HLC project, the supply chain requirements need to be taken into account and potential supply chain performance benefits projected. The paper identified several consideration factors; synergies and enablers that support the development of HLC projects are identified, such as legislation, trust among partners, common suppliers and delivery bases, capable third party logistics (3PL) and an effective commercial model, including a fair sharing of benefits. Research limitations/implications – The research provides new understanding in accounting for the needs of the supply chain when considering an HLC initiative involving leading players from the retail sector. Practical implications – The importance of taking a supply chain approach when evaluating the feasibility of HLC is demonstrated. HLC arrangements among competing supply chains need to be designed and run by taking account of all supply chain partners, namely, suppliers, 3PLs and customers (in this case, retailers). Originality/value – The contribution is threefold: identification of outset consideration factors, ideal required synergies, actioning enablers and wider supply chain metrics of HLC; development of a supply chain-driven model for HLC, which includes in the decision-making whether or not to adopt a horizontal logistics collaboration model, wide supply chain metrics such as stock levels of finished products and shelf availability, inventory, working and fixed capital, and product waste in addition to distribution costs; and, the proposal of a new definition for HLC which challenges published definitions.

Contract Unobservability and Downstream Competition

2020 ◽  
Author(s):  
Xi Li ◽  
Qian Liu
Keyword(s):  
Supply Chain ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
Common Knowledge ◽  
Wholesale Price ◽  
Problem Definition ◽  
Supply Chain Performance ◽  
Supply Chain Contracts ◽  
Managerial Implications ◽  
The Right

Problem definition: In this paper, we consider a supply chain with a manufacturer and two retailers who are contracted through wholesale prices or two-part tariffs. We depart from the existing literature by assuming that contract terms between the manufacturer and a retailer are not observed by the rival retailer. Academic/practical relevance: Although the existing literature typically assumes that they are common knowledge in the market, contract terms may not be observed by rival retailers under certain circumstances. This paper contributes to the literature by studying the effect of contract unobservability on supply chain performance. Methodology: We use game-theoretical methods to find the equilibrium. When there are multiple equilibria, we adopt passive beliefs as an equilibrium-refinement criterion. Results: We find that certain established results regarding observable supply chain contracts do not always apply when those contracts become unobservable to competing retailers. In particular, compared with when using two-part tariff contracts, the manufacturer may benefit from using wholesale-price contracts when contract terms are unobservable. Moreover, the total industry profit may increase under wholesale-price contracts. Managerial implications: Our results offer an alternative explanation for the popularity of wholesale-price contracts and suggest that members of the supply chain must take unobservability into account when selecting the right contracts. We also offer new insights into buyback contracts and downstream mergers under unobservable contracts.

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.

Applications to Game Theory

2016 ◽  
Author(s):  
Jacob K. Goeree ◽  
Charles A. Holt ◽  
Thomas R. Palfrey
Keyword(s):  
Game Theory ◽  
Nash Equilibrium ◽  
Incomplete Information ◽  
Private Information ◽  
Quantal Response ◽  
Feedback Effects ◽  
Symmetric Game ◽  
Wide Range ◽  
The World ◽  
Game Theoretic

This chapter explores several applications of quantal response equilibrium (QRE) to specific games in order to illustrate and expand on the wide range of game-theoretic principles and phenomena associated with QRE that have been highlighted in the previous chapters. The first application considered belongs to the class of continuous games. With a continuum of decisions, QRE predicts a choice distribution that is not merely a (possibly asymmetric) spread to each side of a Nash equilibrium, since “feedback effects” from deviations by one player alter others' expected payoff profiles, which would induce further changes. The second application is a symmetric game with binary actions where players have continuously distributed private information about an unknown state of the world that affects both players' payoffs. The remainder of the chapter looks at three applications to extensive-form games, all of which are games of incomplete information.

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