IDEAS home Printed from https://ideas.repec.org/a/wly/navres/v54y2007i4p421-432.html
   My bibliography  Save this article

Collaboration in contingent capacities with information asymmetry

Author

Listed:
  • Amiya K. Chakravarty
  • Jun Zhang

Abstract

We study the optimal contracting problem between two firms collaborating on capacity investment with information asymmetry. Without a contract, system efficiency is lost due to the profit‐margin differentials among the firms, demand uncertainty, and information asymmetry. With information asymmetry, we demonstrate that the optimal capacity level is characterized by a newsvendor formula with an upward‐adjusted capacity investment cost, and no first‐best solution can be achieved. Our analysis shows that system efficiency can always be improved by the optimal contract and the improvement in system efficience is due to two factors. While the optimal contract may bring the system's capacity level closer to the first‐best capacity level, it prevents the higher‐margin firm from overinvesting and aligns the capacity‐investment decisions of the two firms. Our analysis of a special case demonstrates that, under some circumstances, both firms can benefit from the principal having better information about the agent's costs. © 2007 Wiley Periodicals, Inc. Naval Research Logistics 54:, 2007

Suggested Citation

  • Amiya K. Chakravarty & Jun Zhang, 2007. "Collaboration in contingent capacities with information asymmetry," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(4), pages 421-432, June.
    • Handle: RePEc:wly:navres:v:54:y:2007:i:4:p:421-432
    DOI: 10.1002/nav.20217
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/nav.20217
    Download Restriction: no
    File URL: https://libkey.io/10.1002/nav.20217?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. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    2. Charles J. Corbett, 2001. "Stochastic Inventory Systems in a Supply Chain with Asymmetric Information: Cycle Stocks, Safety Stocks, and Consignment Stock," Operations Research, INFORMS, vol. 49(4), pages 487-500, August.
    3. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    4. Charles J. Corbett & Deming Zhou & Christopher S. Tang, 2004. "Designing Supply Contracts: Contract Type and Information Asymmetry," Management Science, INFORMS, vol. 50(4), pages 550-559, April.
    5. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    6. Albert Y. Ha, 2001. "Supplier‐buyer contracting: Asymmetric cost information and cutoff level policy for buyer participation," Naval Research Logistics (NRL), John Wiley & Sons, vol. 48(1), pages 41-64, February.
    7. Yunzeng Wang & Yigal Gerchak, 2003. "Capacity Games in Assembly Systems with Uncertain Demand," Manufacturing & Service Operations Management, INFORMS, vol. 5(3), pages 252-267, January.
    8. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    9. Charles J. Corbett & Xavier de Groote, 2000. "A Supplier's Optimal Quantity Discount Policy Under Asymmetric Information," Management Science, INFORMS, vol. 46(3), pages 444-450, March.
    10. Ravi Anupindi & Yehuda Bassok & Eitan Zemel, 2001. "A General Framework for the Study of Decentralized Distribution Systems," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 349-368, February.
    11. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ahmad Rusdiansyah & Rescha Dwi Astuti Putri, 2020. "Model of stochastic spanning revenue-sharing contracts for multi-echelon supply chains," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(5), pages 302-313, October.
    2. Xu, Xiaoyan & Choi, Tsan-Ming & Chung, Sai-Ho & Guo, Shu, 2023. "Collaborative-commerce in supply chains: A review and classification of analytical models," International Journal of Production Economics, Elsevier, vol. 263(C).
    3. 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.
    4. Choi, Tsan-Ming & He, Yanyan, 2019. "Peer-to-peer collaborative consumption for fashion products in the sharing economy: Platform operations," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 126(C), pages 49-65.
    5. 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.

    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. Hao Zhang & Mahesh Nagarajan & Greys Sošić, 2010. "Dynamic Supplier Contracts Under Asymmetric Inventory Information," Operations Research, INFORMS, vol. 58(5), pages 1380-1397, October.
    2. Erica L. Plambeck & Terry A. Taylor, 2007. "Implications of Renegotiation for Optimal Contract Flexibility and Investment," Management Science, INFORMS, vol. 53(12), pages 1872-1886, December.
    3. Ehsan Bolandifar & Tianjun Feng & Fuqiang Zhang, 2018. "Simple Contracts to Assure Supply Under Noncontractible Capacity and Asymmetric Cost Information," Manufacturing & Service Operations Management, INFORMS, vol. 20(2), pages 217-231, May.
    4. Onur Kaya & Serra Caner, 2018. "Supply chain contracts for capacity decisions under symmetric and asymmetric information," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 26(1), pages 67-92, March.
    5. İsmail Bakal & Nesim Erkip & Refik Güllü, 2011. "Value of supplier’s capacity information in a two-echelon supply chain," Annals of Operations Research, Springer, vol. 191(1), pages 115-135, November.
    6. Dimitris Kostamis & Izak Duenyas, 2011. "Purchasing Under Asymmetric Demand and Cost Information: When Is More Private Information Better?," Operations Research, INFORMS, vol. 59(4), pages 914-928, August.
    7. Dong, Yan & Xu, Kefeng & Evers, Philip T., 2012. "Transshipment incentive contracts in a multi-level supply chain," European Journal of Operational Research, Elsevier, vol. 223(2), pages 430-440.
    8. Brusset, Xavier, 2009. "Choosing a transport contract over multiple periods," MPRA Paper 18392, University Library of Munich, Germany, revised 09 Jan 2009.
    9. Yong Zha & Kehong Chen & Xiaohang Yue & Yugang Yu & Samar Mukhopadhyay, 2019. "Trade credit contract in the presence of retailer investment opportunity," Naval Research Logistics (NRL), John Wiley & Sons, vol. 66(4), pages 283-296, June.
    10. Z. Justin Ren & Morris A. Cohen & Teck H. Ho & Christian Terwiesch, 2010. "Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy," Operations Research, INFORMS, vol. 58(1), pages 81-93, February.
    11. Dimitris Zissis & George Ioannou & Apostolos Burnetas, 2020. "Coordinating Lot Sizing Decisions Under Bilateral Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 371-387, February.
    12. Lusheng Shao & Xiaole Wu & Fuqiang Zhang, 2020. "Sourcing Competition under Cost Uncertainty and Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 447-461, February.
    13. Lennart C. Johnsen & Abdolkarim Sadrieh & Guido Voigt, 2021. "Short‐term vs. Long‐term Contracting: Empirical Assessment of the Ratchet Effect in Supply Chain Interaction," Production and Operations Management, Production and Operations Management Society, vol. 30(7), pages 2252-2272, July.
    14. Xin Yun & Hao Liu & Yi Li & Kin Keung Lai, 2023. "Contract design under asymmetric demand information for sustainable supply chain practices," Annals of Operations Research, Springer, vol. 324(1), pages 1429-1459, May.
    15. Leon Yang Chu & Noam Shamir & Hyoduk Shin, 2017. "Strategic Communication for Capacity Alignment with Pricing in a Supply Chain," Management Science, INFORMS, vol. 63(12), pages 4366-4377, December.
    16. Gérard P. Cachon & Fuqiang Zhang, 2006. "Procuring Fast Delivery: Sole Sourcing with Information Asymmetry," Management Science, INFORMS, vol. 52(6), pages 881-896, June.
    17. Wang, Jian-Cai & Lau, Hon-Shiang & Lau, Amy Hing Ling, 2009. "When should a manufacturer share truthful manufacturing cost information with a dominant retailer?," European Journal of Operational Research, Elsevier, vol. 197(1), pages 266-286, August.
    18. 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.
    19. Roemer, Nils & Müller, Sven & Voigt, Guido, 2023. "A choice-based optimization approach for contracting in supply chains," European Journal of Operational Research, Elsevier, vol. 305(1), pages 271-286.
    20. Holly Lutze & Özalp Özer, 2008. "Promised Lead-Time Contracts Under Asymmetric Information," Operations Research, INFORMS, vol. 56(4), pages 898-915, August.

    More about this item

    Statistics

    Access and download statistics

    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:wly:navres:v:54:y:2007:i:4:p:421-432. 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: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1520-6750 .

    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.