Inventory Policies and Contracts in a Two-Stage Serial Supply Chain with Asymmetric Cost Information

Abstract

Inventory policies of two-stage serial supply chain under asymmetric cost information and contracts to reveal the private information are investigated. Inventory holding costs are charged at each stage, but are unknown to each other. A consumer backorder generates cost. The backorder cost is split between the retailer and the supplier. Therefore, the supplier’s backorder cost is increased while his holding cost is lowered. The supplier and the retailer choose their base stock policies independently to minimize their own costs. The utility under asymmetric information environment is inefficient compared to that under complete information environment. Firms are keen on procuring the inside information of their counter parts, but are reluctant to reveal their own. Therefore the contract is developed under which each stage improve their utility as if in the complete cost information environment. Each firm pays information purchasing fee to buy the other’s private information. Activities such as accepting or rejecting of a contract could make your private information more public. The developed contract considers these activities as well. The entire supply chain’s utility is also improved with the contract. The contract satisfies individual-rationality conditions of both information seller and information buyer.