Designing Supply Contracts: Contract Type and Information Asymmetry

This paper studies the value to a supplier of obtaining better information about a buyer's cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part...

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Bibliographic Details
Published in:Management science 2004-04, Vol.50 (4), p.550-559
Main Authors: Corbett, Charles J, Zhou, Deming, Tang, Christopher S
Format: Article
Language:English
Subjects:
Asymmetric information
Bilateral monopolies
Business management
Business strategies
Business studies
Buyers
contracting
Contracts
Information
Information asymmetry
Information economics
Information value
Management science
Marketing
Marketing research
Mathematical models
Operations research
Pliers
Pricing
Pricing policies
Product management
Retail stores
Studies
Suppliers
supply chains
Supply contracts
Supply management
Variable costs
Wholesale prices
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Summary:This paper studies the value to a supplier of obtaining better information about a buyer's cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part linear schemes, and twopart nonlinear schemes), each under full and incomplete information about the buyer's cost structure. We allow both sides to refuse to trade by explicitly including reservation profit levels for both; for the supplier, this is implemented through a cutoff policy. We derive the supplier's optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts. Our key findings are as follows: First, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, the proportion of buyers the supplier will choose to exclude can be substantial.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.1030.0173