Contract preference with stochastic cost learning in a two-period supply chain under asymmetric information

Shichen Zhang and Jianxiong Zhang

International Journal of Production Economics, 2018, vol. 196, issue C, 226-247

Abstract: We consider a two-period supply chain where the supplier with stochastic cost learning sells products through a retailer who may keep market potential information private. Our main purpose is to investigate the contract preferences for such a supply chain and to examine whether both parties prefer to keep contract type consistency over the two periods. We also focus on how the stochastic learning effect affects the contract preferences. Two common contract types, one-part linear contract and two-part nonlinear contract are considered, and either of them can be adopted in each period. The results show that the supplier may have incentives to change the contract type and adopt a nonlinear and linear contract subsequently in the two periods if the retailer has a different evaluation on the random learning rate. In addition, there exist two contract combinations with which the chain members can reach a consensus on the contract preference under asymmetric information, while such a consensus can never occur under full information. Specifically, if both the mean and variance of the learning rate held by the supplier are relatively large, a two-part nonlinear contract offered in both periods can help both players to reach contract preference consensus. If the supplier holds a relatively lower evaluation on the mean of the learning rate than that held by the retailer, the chain members may reach a consensus on contract preference via a nonlinear and linear contract subsequently adopted.

Keywords: Supply chain management; Contract design; Asymmetric information; Stochastic cost learning; Two-period game (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:196:y:2018:i:c:p:226-247

DOI: 10.1016/j.ijpe.2017.11.022

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