IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v47y2001i5p709-715.html
   My bibliography  Save this article

Producer-Supplier Contracts with Incomplete Information

Author

Listed:
  • Wei Shi Lim

    (Faculty of Business Administration, National University of Singapore, 15 Law Link, S117591, Singapore)

Abstract

This paper investigates the contract design problem of a producer when he purchases parts from a supplier, and there is incomplete information regarding the quality of the parts. This is the first game-theoretic model of quality control that captures this informational asymmetry. We focus on two compensation schemes embedded in the contract, namely, price rebate (when inspection is done upon receipt of the parts) and warranty. We show that when a full-price rebate is not possible and the producer and the supplier have to share the damage costs, an optimal contract is such that the supplier compensates the producer by the same amount, regardless of his quality type. However, a supplier with low quality is more likely to be offered a contract with an inspection scheme, while a supplier with high quality is constrained with a warranty scheme. We also show that when the producer need not share the cost in exactly one of the compensation schemes, he may still offer the other compensation scheme to a supplier type depending on the relative costs involved, the maximum compensation cost acceptable by all supplier types, and his ex ante beliefs about the quality level of the supplier.

Suggested Citation

  • Wei Shi Lim, 2001. "Producer-Supplier Contracts with Incomplete Information," Management Science, INFORMS, vol. 47(5), pages 709-715, May.
    • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:5:p:709-715
    DOI: 10.1287/mnsc.47.5.709.10479
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.47.5.709.10479
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.47.5.709.10479?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    2. Lode Li, 1992. "The Role of Inventory in Delivery-Time Competition," Management Science, INFORMS, vol. 38(2), pages 182-197, February.
    3. Ehud Kalai & Morton I. Kamien & Michael Rubinovitch, 1992. "Optimal Service Speeds in a Competitive Environment," Management Science, INFORMS, vol. 38(8), pages 1154-1163, August.
    4. Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
    5. Lode Li & Yew Sing Lee, 1994. "Pricing and Delivery-Time Performance in a Competitive Environment," Management Science, INFORMS, vol. 40(5), pages 633-646, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James Ang & Masao Fukushima & Fanwen Meng & Takahiro Noda & Jie Sun, 2013. "Establishing Nash equilibrium of the manufacturer–supplier game in supply chain management," Journal of Global Optimization, Springer, vol. 56(4), pages 1297-1312, August.
    2. So, Kut C. & Song, Jing-Sheng, 1998. "Price, delivery time guarantees and capacity selection," European Journal of Operational Research, Elsevier, vol. 111(1), pages 28-49, November.
    3. Krishnan S. Anand & M. Faz{i}l Paç & Senthil Veeraraghavan, 2011. "Quality-Speed Conundrum: Trade-offs in Customer-Intensive Services," Management Science, INFORMS, vol. 57(1), pages 40-56, January.
    4. Weixin Shang & Liming Liu, 2011. "Promised Delivery Time and Capacity Games in Time-Based Competition," Management Science, INFORMS, vol. 57(3), pages 599-610, March.
    5. Gérard P. Cachon & Patrick T. Harker, 2002. "Competition and Outsourcing with Scale Economies," Management Science, INFORMS, vol. 48(10), pages 1314-1333, October.
    6. Stephen M. Gilbert & Z. Kevin Weng, 1998. "Incentive Effects Favor Nonconsolidating Queues in a Service System: The Principal--Agent Perspective," Management Science, INFORMS, vol. 44(12-Part-1), pages 1662-1669, December.
    7. Mei Xue & Patrick T. Harker, 2003. "Service Co-Production, Customer Efficiency and Market Competition," Center for Financial Institutions Working Papers 03-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Fernando Bernstein & Francis de Véricourt, 2008. "Competition for Procurement Contracts with Service Guarantees," Operations Research, INFORMS, vol. 56(3), pages 562-575, June.
    9. Joseph Hall & Evan Porteus, 2000. "Customer Service Competition in Capacitated Systems," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 144-165, November.
    10. Albert Y. Ha & Lode Li & Shu-Ming Ng, 2003. "Price and Delivery Logistics Competition in a Supply Chain," Management Science, INFORMS, vol. 49(9), pages 1139-1153, September.
    11. Kut C. So, 2000. "Price and Time Competition for Service Delivery," Manufacturing & Service Operations Management, INFORMS, vol. 2(4), pages 392-409, April.
    12. Lim, Wei Shi, 2000. "A lemons market? An incentive scheme to induce truth-telling in third party logistics providers," European Journal of Operational Research, Elsevier, vol. 125(3), pages 519-525, September.
    13. Ryan W. Buell & Michael I. Norton, 2011. "The Labor Illusion: How Operational Transparency Increases Perceived Value," Management Science, INFORMS, vol. 57(9), pages 1564-1579, February.
    14. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
    15. Murat Kaya & Özalp Özer, 2009. "Quality risk in outsourcing: Noncontractible product quality and private quality cost information," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(7), pages 669-685, October.
    16. Liming Liu & Mahmut Parlar & Stuart X. Zhu, 2007. "Pricing and Lead Time Decisions in Decentralized Supply Chains," Management Science, INFORMS, vol. 53(5), pages 713-725, May.
    17. Anthony M. Kwasnica & Euthemia Stavrulaki, 2008. "Competitive location and capacity decisions for firms serving time‐sensitive customers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 55(7), pages 704-721, October.
    18. Philipp Afèche & Haim Mendelson, 2004. "Pricing and Priority Auctions in Queueing Systems with a Generalized Delay Cost Structure," Management Science, INFORMS, vol. 50(7), pages 869-882, July.
    19. Duane Christ & Benjamin Avi-Itzhak, 2002. "Strategic Equilibrium for a Pair of Competing Servers with Convex Cost and Balking," Management Science, INFORMS, vol. 48(6), pages 813-820, June.
    20. Gad Allon & Awi Federgruen, 2008. "Service Competition with General Queueing Facilities," Operations Research, INFORMS, vol. 56(4), pages 827-849, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:47:y:2001:i:5:p:709-715. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.