Understanding order volatility of MTO outsourcing with price speculation and information asymmetry

In this paper, we study the phenomena of stimulated volatility in business cycles, termed the "bullwhip effect" in supply chain literature, by conducting computational experiments on the equilibrium behavior of a two-stage, two-firm supply chain under the following settings: 1) Without any form of centralization (e.g., central planning and optimization); 2) With price speculation; 3) With contract negotiation under asymmetric information about production costs. We found from this study that the cyclic fluctuation can be an outcome of equilibrium behavior in a supply chain, and the fluctuation is intrinsically associated with the interactive "optimal" responses of individual parties in the system. Therefore, reducing order volatility may not necessarily be a plausible course of action as to improve system performance.