Contracting with Asymmetric Demand Information in Supply Chains

21 Pages Posted: 26 Nov 2010 Last revised: 15 Nov 2012

See all articles by Volodymyr Babich

Volodymyr Babich

McDonough School of Business, Georgetown University

Hantao Li

Case Western Reserve University - Weatherhead School of Management

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

Yunzeng Wang

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 15, 2008

Abstract

When a retailer holds no private information, a powerful supplier can use several contract types to extract for herself the first-best channel profit, leaving the retailer nothing but his reservation profit. In the case where the retailer holds private information on the probability distribution of market demand, most well analyzed contracts do not allow the supplier to achieve for herself the first-best channel profit. In equilibrium, the retailer is able to extract an information rent above his reservation profit, and the overall channel may deviate from its first-best solution. This paper shows that using judicially designed wholesale price contracts involving a buyback policy, a supplier can theoretically avoid paying any information rent to the privately informed retailer, and, at the same time, can extract all the first-best channel profit.

Keywords: contract design, screening, buyback contract

Suggested Citation

Babich, Volodymyr and Li, Hantao and Ritchken, Peter H. and Wang, Yunzeng, Contracting with Asymmetric Demand Information in Supply Chains (November 15, 2008). Available at SSRN: https://ssrn.com/abstract=1715275 or http://dx.doi.org/10.2139/ssrn.1715275

Volodymyr Babich (Contact Author)

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

Hantao Li

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

Yunzeng Wang

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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