Simple Contracts to Assure Supply Under Noncontractible Capacity and Asymmetric Cost Information

• DOI: 10.1287/msom.2017.0628
• Publication Date: 2017-08-11T18:33:24Z
• Authors: Ehsan Bolandifar; Tianjun Feng; Fuqiang Zhang
• Keywords: Private information retrieval; Adverse selection; Contractible space

This paper studies a global sourcing problem where buyer sources product from supplier to satisfy uncertain market demand. With the increasing length and complexity of today’s supply chains, may face two issues when designing contract: adverse selection (i.e., supplier’s cost structure is private information) noncontractible capacity investment not contractible). We show that does necessarily lead lower profit for buyer, but it require more complex contract format achieve optimal (second-best) profit. Interestingly, we find single, linear (or two-part tariff) could be under certain conditions. Even such suboptimal, can deliver close-to-optimal wide range situations. These findings indicate value using menu contracts negligible in chain setting. A simple tariff an attractive option buyers whose goal ensure while facing both uncertainty contractibility issues. The also provides new explanation prevalence practice. online appendix available at https://doi.org/10.1287/msom.2017.0628 .