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TECHNICAL NOTE---Decentralized Inventory Sharing with Asymmetric Information

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  • Xinghao Yan

    (Richard Ivey School of Business, University of Western Ontario, London, Ontario N6A 3K7, Canada)

  • Hui Zhao

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

Abstract

We study the information asymmetry issues in a decentralized inventory-sharing system consisting of a manufacturer and two independent retailers, who privately hold demand information, noncooperatively place their orders, but cooperatively share inventories with each other. We find that although the manufacturer needs retailers' mean demand and standard deviation for her wholesale price decision, each retailer only needs to know the other retailer's demand standard deviation for his order quantity decision. However, an incentive compatibility analysis shows that retailers have incentives to share their demand information untruthfully. Although a truth-inducing scheme can be developed for a system with symmetric retailers who share information between themselves, no such scheme can be developed to ensure truth-telling to the manufacturer. Further, we develop a coordination mechanism (CIS) for the decentralized inventory-sharing system, considering information asymmetry . We show that CIS coordinates the manufacturer-retailers system and leads to an all-win situation under complete information. More importantly, CIS minimizes the value of information such that each party can obtain expected profits very close to their first-best profits even under asymmetric information and hence indirectly solves the information asymmetry problem. To our knowledge, this work is the first to study decentralized inventory sharing and its coordination considering asymmetric information .

Suggested Citation

  • Xinghao Yan & Hui Zhao, 2011. "TECHNICAL NOTE---Decentralized Inventory Sharing with Asymmetric Information," Operations Research, INFORMS, vol. 59(6), pages 1528-1538, December.
    • Handle: RePEc:inm:oropre:v:59:y:2011:i:6:p:1528-1538
    DOI: 10.1287/opre.1110.0953
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    References listed on IDEAS

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    Cited by:

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    5. Fang, Debin & Wang, Jiancheng, 2020. "Horizontal capacity sharing between asymmetric competitors," Omega, Elsevier, vol. 97(C).
    6. Yi Liao & Jun Li & Xinxin Hu & Ying Li & Wenjing Shen, 2020. "Application of Lateral Transshipment in Cost Reduction of Decentralized Systems," Sustainability, MDPI, vol. 12(12), pages 1-21, June.
    7. Wei Zhang & Long Gao & Mohammad Zolghadr & Dawei Jian & Mohsen ElHafsi, 2023. "Dynamic incentives for sustainable contract farming," Production and Operations Management, Production and Operations Management Society, vol. 32(7), pages 2049-2067, July.
    8. Song, Yuyue, 2020. "Impact of untrue reporting in a two-echelon supply chain with asymmetric inventory information," International Journal of Production Economics, Elsevier, vol. 230(C).
    9. Chun-Hung Chiu & Gang Hao & Xin Dai & Hang Xie, 2020. "Inventory sharing of professional optics product supply chain with equal power agents," Annals of Operations Research, Springer, vol. 291(1), pages 169-194, August.
    10. Li, Ying & Liao, Yi & Hu, Xinxin & Shen, Wenjing, 2020. "Lateral transshipment with partial request and random switching," Omega, Elsevier, vol. 92(C).

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