Two-echelon supply chain coordination under information asymmetry

Consider a two-echelon supply chain with a supplier and a retailer under the classical economic order quantity (EOQ) setting. We assume that both the supplier and the retailer want to minimise their own costs, without taking the other party into consideration. In particular, they do not strive for perfect (centralised) supply chain coordination. Coordination is also hindered by the asymmetric power relation between the supplier and the retailer. The retailer has the market power to force the supplier to satisfy the retailer's ordering policy. However, by offering a contract the supplier can persuade the retailer to change his policy. This leads to an optimisation problem for the supplier to determine a contract that is accepted by the retailer and that minimises his own costs.

If the retailer shares his cost parameters with the supplier, the resulting optimisation problem is straightforward to solve. We consider the case where the retailer keeps his holding costs private. Hence, there is information asymmetry. In this case, the supplier has to design an optimal menu of contracts from which the retailer can choose. We show how to solve this problem efficiently and provide structural properties of the optimal solution.

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