Two-echelon supply chain coordination under information asymmetry with multiple types

We analyse a principal-agent contracting model with asymmetric information between a supplier and a retailer. Both the supplier and the retailer have the classical non-linear economic ordering cost functions consisting of ordering and holding costs. We assume that the retailer has the market power to enforce any order quantity. Furthermore, the retailer has private holding costs. The supplier wants to minimise his expected costs by offering a menu of contracts with side payments as an incentive mechanism. We consider a general number of discrete single-dimensional retailer types with type-dependent default options. A natural and common model formulation is non-convex, but we present an equivalent convex formulation. Hence, the contracting model can be solved efficiently for a general number of retailer types. We also derive structural properties of the optimal menu of contracts. In particular, we completely characterise the optimum for two retailer types and provide a minimal list of candidate contracts for three types. We show that the retailer’s lying behaviour is more complex than simply lying to have higher costs. Finally, we prove a sufficient condition to guarantee unique contracts in the optimal solution for a general number of retailer types.