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Sourcing Contract under Countervailing Incentives

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  • Xianghua Gan
  • Qi Feng
  • Suresh P. Sethi

Abstract

We study a retailer’s sourcing contract when the supplier’s reservation profit (offered by his outside options) depends on his cost, which is privately known to only the supplier. An interesting discovery from our analysis is that supply chain coordination may be achieved despite the information asymmetry between the two firms regarding the supplier’s type (i.e., his cost). This happens when the marginal contribution of the supplier’s cost efficiency to the trade matches with the supplier’s marginal reservation profit. In this case, the optimal contract quantities maximize the supply chain profits for the respective supplier types, and no information rent is paid to any supplier type. For the general case, we show that, regardless of his type, the supplier may have an incentive to overstate or understate his cost, depending on whether or not his marginal contribution to the trade exceeds his marginal reservation profit. We demonstrate six possible forms of the optimal contract. Observations from our analysis contrast with those derived from previous studies, complementing the theory of countervailing incentives.

Suggested Citation

  • Xianghua Gan & Qi Feng & Suresh P. Sethi, 2019. "Sourcing Contract under Countervailing Incentives," Production and Operations Management, Production and Operations Management Society, vol. 28(10), pages 2486-2499, October.
  • Handle: RePEc:bla:popmgt:v:28:y:2019:i:10:p:2486-2499
    DOI: 10.1111/poms.13057
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    Cited by:

    1. De Giovanni, Pietro, 2021. "Smart Supply Chains with vendor managed inventory, coordination, and environmental performance," European Journal of Operational Research, Elsevier, vol. 292(2), pages 515-531.
    2. Jian Chen & He Huang & Liming Liu & Hongyan Xu, 2021. "Price Delegation or Not? The Effect of Heterogeneous Sales Agents," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1350-1364, May.
    3. Huang, Song & Wang, Yun & Zhang, Xianmei, 2023. "Contracting with countervailing incentives under asymmetric cost information in a dual-channel supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 171(C).
    4. Avinadav, Tal & Chernonog, Tatyana & Khmelnitsky, Eugene, 2021. "Revenue-sharing between developers of virtual products and platform distributors," European Journal of Operational Research, Elsevier, vol. 290(3), pages 927-945.

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