Contracting with an urgent supplier under cost information asymmetry

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

48 Scopus Citations
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Author(s)

  • He Xu
  • Ning Shi
  • Shi-hua Ma
  • Kin Keung Lai

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)374-383
Journal / PublicationEuropean Journal of Operational Research
Volume206
Issue number2
Publication statusPublished - 16 Oct 2010

Abstract

We investigate a contract setting problem faced by a manufacturer who can procure major modules from an overseas supplier, as well as a local supplier. The overseas supplier is prime and offers quality products, whereas the local supplier is viewed only as a backup, and its products are inferior in quality. As the local supplier needs to put in additional effort to fulfill the urgent orders, it is difficult for the manufacturer to estimate this urgent supplier's production cost. This asymmetric cost information becomes an obstacle for the manufacturer in managing the urgent supplier. In this paper, we study two types of contingent contracts. One is the common price-only contract, and the other is a contract menu consisting of a transfer payment and a lead time quotation. We construct a Stackelberg game model and evaluate how the involvement of an urgent supplier with private cost information affects performances of the prime supplier and the manufacturer in different scenarios (with or without the urgent supplier, under different contingent contracts). We also conduct numerical experiments to show how the parameters of the contracts affect profits of the manufacturer. © 2010 Elsevier B.V. All rights reserved.

Research Area(s)

  • Asymmetric information, Decision analysis, Game theory, Optimization

Citation Format(s)

Contracting with an urgent supplier under cost information asymmetry. / Xu, He; Shi, Ning; Ma, Shi-hua; Lai, Kin Keung.

In: European Journal of Operational Research, Vol. 206, No. 2, 16.10.2010, p. 374-383.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review