January  2020, 16(1): 261-287. doi: 10.3934/jimo.2018151

Mechanism design in a supply chain with ambiguity in private information

School of Business Administration, Hunan University, Changsha, 410082, China

* Corresponding author

Received  October 2017 Revised  May 2018 Published  September 2018

Fund Project: This work has been supported by the the National Social Science Foundation of China under Project No. 12CGL023. The authors are grateful to the anonymous referees for their constructive comments and suggestions.

This paper considers a two-echelon supply chain with one supplier and one retailer. The retailer holds private information on the stochastic demand, and the supplier knows neither the market information nor its prior distribution. Two decision making criteria based on the generalized lexicographic preference are proposed to the supplier: the profit criterion and the regret criterion. Our analyses show that the profit criterion always coordinates the supply chain, while the regret criterion does not. If the market state is low, the profit criterion generates higher profit for the supplier than the regret criterion does, and vise versa. In both criteria, we show that the supplier's regret is bounded by both the range of the market state and the volatility of the demand. We further show that, the supplier should cooperate with the retailer with full demand information if the differences between market states are large enough, while selling the product by himself is better if the differences between market states are small enough.

Citation: Feimin Zhong, Wei Zeng, Zhongbao Zhou. Mechanism design in a supply chain with ambiguity in private information. Journal of Industrial & Management Optimization, 2020, 16 (1) : 261-287. doi: 10.3934/jimo.2018151
References:
[1]

V. BabichH. LiP. Ritchken and Y. Wang, The distribution-free newsboy problem: Extensions to the shortage penalty case, International Journal of Production Economics, 93 (2005), 465-477.   Google Scholar

[2]

V. BabichH. LiP. Ritchken and Y. Wang, Contracting with asymmetric demand information in supply chains, European Journal of Operational Research, 217 (2012), 333-341.  doi: 10.1016/j.ejor.2011.09.034.  Google Scholar

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F. A. Behringer, Lexicographic quasiconcave multiobjective programming, Mathematical Methods of Operations Research, 21 (1977), 103-116.   Google Scholar

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A. BurnetasS. M. Gilbert and C. E. Smith, Quantity discounts in single-period supply contracts with asymmetric demand information, IIE Transactions, 39 (2007), 465-479.   Google Scholar

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G. P. Cachon, Supply chain coordination with contracts, in Handbooks in Operations Research and Management Science (eds. A. G. De Kok and S. C. Graves), Elsevier, 2003, 227-339. Google Scholar

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W. Chu, Demand signalling and screening in channels of distribution, Marketing Science, 11 (1992), 327-347.  doi: 10.1287/mksc.11.4.327.  Google Scholar

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J. Cole, Boeing, pushing for record production, finds parts shortages, delivery delays, Wall Street Journal, 1997. Google Scholar

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P. Engardio, Why the supply chain broke down, Business Week, 2001. Google Scholar

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X. Fang and Y. Wang, Contract efficiency: Demand uncertainty, price sensitivity and information asymmetry, International Journal of Operational Research, 15 (2012), 235-259.  doi: 10.1504/IJOR.2012.049481.  Google Scholar

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G. Gallego and I. Moon, The distribution free newsboy problem: review and extensions, Journal of the Operational Research Society, 44 (1993), 825-834.   Google Scholar

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X. GanS. P. Sethi and J. Zhou, Commitment-penalty contracts in drop-shipping supply chains with asymmetric demand information, European Journal of Operational Research, 204 (2010), 449-462.  doi: 10.1016/j.ejor.2009.11.008.  Google Scholar

[12]

Q. Geng and M. C. Minutolo, Failure fee under stochastic demand and information asymmetry, International Journal of Production Economics, 128 (2010), 269-279.  doi: 10.1016/j.ijpe.2010.07.025.  Google Scholar

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J. Kamburowski, The distribution-free newsboy problem under the worst-case and best-case scenarios, European Journal of Operational Research, 237 (2014), 106-112.  doi: 10.1016/j.ejor.2014.01.066.  Google Scholar

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J. Kamburowski, On the distribution-free newsboy problem with some non-skewed demands, Operations Research Letters, 43 (2015), 165-171.  doi: 10.1016/j.orl.2015.01.005.  Google Scholar

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C. M. Lee and S. L. Hsu, The effect of advertising on the distribution-free newsboy problem, International Journal of Production Economics, 129 (2011), 217-224.  doi: 10.1016/j.ijpe.2010.10.009.  Google Scholar

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H. L. LeeV. Padmanabhan and S. Whang, Information distortion in a supply chain: The bullwhip effect, Management science, 43 (1997), 546-558.   Google Scholar

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D. LeiJ. Li and Z. Liu, Supply chain contracts under demand and cost disruptions with asymmetric information, International Journal of Production Economics, 139 (2012), 116-126.  doi: 10.1016/j.ijpe.2011.11.031.  Google Scholar

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H. LiP. Ritchken and Y. Wang, Option and forward contracting with asymmetric information: Valuation issues in supply chains, European Journal of Operational Research, 197 (2009), 134-148.  doi: 10.1016/j.ejor.2008.06.021.  Google Scholar

[19]

Z. LiuR. ZhaoX. Liu and L. Chen, Contract designing for a supply chain with uncertain information based on confidence level, Applied Soft Computing, 56 (2017), 617-631.   Google Scholar

[20]

Z. LiJ. K. RyanL. Shao and D. Sun, Supply contract design for competing heterogeneous suppliers under asymmetric information, Production and Operations Managements, 24 (2015), 791-807.  doi: 10.1111/poms.12294.  Google Scholar

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F. LvS. Ma and X. Guan, The implication of capacity reservation contracts in assembly system with asymmetric demand information, International Journal of Production Research, 53 (2015), 5564-5591.  doi: 10.1080/00207543.2015.1036150.  Google Scholar

[22]

I. Moon and S. Choi, The distribution free newsboy problem with balking, Journal of the Operational Research Society, 6 (2016), 537-542.   Google Scholar

[23]

I. Moon, D. K. Yoo and S. Saha, The distribution-free newsboy problem with multiple discounts and upgrades, Mathematical Problems in Engineering, 2016 (2016), Article ID 2017253, 11 pages. doi: 10.1155/2016/2017253.  Google Scholar

[24]

J. MostardR. De Koster and R. Teunter, The distribution-free newsboy problem with resalable returns, International Journal of Production Economics, 97 (2005), 329-342.   Google Scholar

[25]

R. B. Myerson, Incentive compatibility and the bargaining problem, Econometrica, 47 (1979), 61-73.  doi: 10.2307/1912346.  Google Scholar

[26]

Ö. Özer and W. Wei, Strategic commitments for an optimal capacity decision under asymmetric forecast information, Management Science, 52 (2006), 1238-1257.   Google Scholar

[27]

G. Perakis and G. Roels, Regret in the newsvendor model with partial information, Operations Research, 56 (2008), 188-203.  doi: 10.1287/opre.1070.0486.  Google Scholar

[28]

S. Saghafian and B. Tomlin, The newsvendor under demand ambiguity: Combining data with moment and tail information, Operations Research, 64 (2016), 167-185.  doi: 10.1287/opre.2015.1454.  Google Scholar

[29]

H. ScarfK. J. Arrow and S. Karlin, A min-max solution of an inventory problem, Studies in the mathematical theory of inventory and production, 10 (1958), 201-209.   Google Scholar

[30]

B. Shen, T. M. Choi and S. Minner, A review on supply chain contracting with information considerations: information updating and information asymmetry, International Journal of Production Research, (2018). doi: 10.1080/00207543.2018.1467062.  Google Scholar

[31]

T. A. Taylor and W. Xiao, Incentives for retailer forecasting: Rebates vs. returns, Management Science, 55 (2009), 1654-1669.  doi: 10.1287/mnsc.1090.1045.  Google Scholar

[32]

J. Wang, R. Zhao and Y. Lan, Incentives for a retailer with two-dimensional asymmetric information, Working paper, Available at SSRN 2443649. Google Scholar

[33]

T. Xiao and J. Shi, Consumer returns reduction and information revelation mechanism for a supply chain, Annals of Operations Research, 240 (2016), 661-681.  doi: 10.1007/s10479-014-1592-8.  Google Scholar

[34]

J. YueB. Chen and M. C. Wang, Expected value of distribution information for the newsvendor problem, Operations research, 54 (2006), 1128-1136.  doi: 10.1287/opre.1060.0318.  Google Scholar

show all references

References:
[1]

V. BabichH. LiP. Ritchken and Y. Wang, The distribution-free newsboy problem: Extensions to the shortage penalty case, International Journal of Production Economics, 93 (2005), 465-477.   Google Scholar

[2]

V. BabichH. LiP. Ritchken and Y. Wang, Contracting with asymmetric demand information in supply chains, European Journal of Operational Research, 217 (2012), 333-341.  doi: 10.1016/j.ejor.2011.09.034.  Google Scholar

[3]

F. A. Behringer, Lexicographic quasiconcave multiobjective programming, Mathematical Methods of Operations Research, 21 (1977), 103-116.   Google Scholar

[4]

A. BurnetasS. M. Gilbert and C. E. Smith, Quantity discounts in single-period supply contracts with asymmetric demand information, IIE Transactions, 39 (2007), 465-479.   Google Scholar

[5]

G. P. Cachon, Supply chain coordination with contracts, in Handbooks in Operations Research and Management Science (eds. A. G. De Kok and S. C. Graves), Elsevier, 2003, 227-339. Google Scholar

[6]

W. Chu, Demand signalling and screening in channels of distribution, Marketing Science, 11 (1992), 327-347.  doi: 10.1287/mksc.11.4.327.  Google Scholar

[7]

J. Cole, Boeing, pushing for record production, finds parts shortages, delivery delays, Wall Street Journal, 1997. Google Scholar

[8]

P. Engardio, Why the supply chain broke down, Business Week, 2001. Google Scholar

[9]

X. Fang and Y. Wang, Contract efficiency: Demand uncertainty, price sensitivity and information asymmetry, International Journal of Operational Research, 15 (2012), 235-259.  doi: 10.1504/IJOR.2012.049481.  Google Scholar

[10]

G. Gallego and I. Moon, The distribution free newsboy problem: review and extensions, Journal of the Operational Research Society, 44 (1993), 825-834.   Google Scholar

[11]

X. GanS. P. Sethi and J. Zhou, Commitment-penalty contracts in drop-shipping supply chains with asymmetric demand information, European Journal of Operational Research, 204 (2010), 449-462.  doi: 10.1016/j.ejor.2009.11.008.  Google Scholar

[12]

Q. Geng and M. C. Minutolo, Failure fee under stochastic demand and information asymmetry, International Journal of Production Economics, 128 (2010), 269-279.  doi: 10.1016/j.ijpe.2010.07.025.  Google Scholar

[13]

J. Kamburowski, The distribution-free newsboy problem under the worst-case and best-case scenarios, European Journal of Operational Research, 237 (2014), 106-112.  doi: 10.1016/j.ejor.2014.01.066.  Google Scholar

[14]

J. Kamburowski, On the distribution-free newsboy problem with some non-skewed demands, Operations Research Letters, 43 (2015), 165-171.  doi: 10.1016/j.orl.2015.01.005.  Google Scholar

[15]

C. M. Lee and S. L. Hsu, The effect of advertising on the distribution-free newsboy problem, International Journal of Production Economics, 129 (2011), 217-224.  doi: 10.1016/j.ijpe.2010.10.009.  Google Scholar

[16]

H. L. LeeV. Padmanabhan and S. Whang, Information distortion in a supply chain: The bullwhip effect, Management science, 43 (1997), 546-558.   Google Scholar

[17]

D. LeiJ. Li and Z. Liu, Supply chain contracts under demand and cost disruptions with asymmetric information, International Journal of Production Economics, 139 (2012), 116-126.  doi: 10.1016/j.ijpe.2011.11.031.  Google Scholar

[18]

H. LiP. Ritchken and Y. Wang, Option and forward contracting with asymmetric information: Valuation issues in supply chains, European Journal of Operational Research, 197 (2009), 134-148.  doi: 10.1016/j.ejor.2008.06.021.  Google Scholar

[19]

Z. LiuR. ZhaoX. Liu and L. Chen, Contract designing for a supply chain with uncertain information based on confidence level, Applied Soft Computing, 56 (2017), 617-631.   Google Scholar

[20]

Z. LiJ. K. RyanL. Shao and D. Sun, Supply contract design for competing heterogeneous suppliers under asymmetric information, Production and Operations Managements, 24 (2015), 791-807.  doi: 10.1111/poms.12294.  Google Scholar

[21]

F. LvS. Ma and X. Guan, The implication of capacity reservation contracts in assembly system with asymmetric demand information, International Journal of Production Research, 53 (2015), 5564-5591.  doi: 10.1080/00207543.2015.1036150.  Google Scholar

[22]

I. Moon and S. Choi, The distribution free newsboy problem with balking, Journal of the Operational Research Society, 6 (2016), 537-542.   Google Scholar

[23]

I. Moon, D. K. Yoo and S. Saha, The distribution-free newsboy problem with multiple discounts and upgrades, Mathematical Problems in Engineering, 2016 (2016), Article ID 2017253, 11 pages. doi: 10.1155/2016/2017253.  Google Scholar

[24]

J. MostardR. De Koster and R. Teunter, The distribution-free newsboy problem with resalable returns, International Journal of Production Economics, 97 (2005), 329-342.   Google Scholar

[25]

R. B. Myerson, Incentive compatibility and the bargaining problem, Econometrica, 47 (1979), 61-73.  doi: 10.2307/1912346.  Google Scholar

[26]

Ö. Özer and W. Wei, Strategic commitments for an optimal capacity decision under asymmetric forecast information, Management Science, 52 (2006), 1238-1257.   Google Scholar

[27]

G. Perakis and G. Roels, Regret in the newsvendor model with partial information, Operations Research, 56 (2008), 188-203.  doi: 10.1287/opre.1070.0486.  Google Scholar

[28]

S. Saghafian and B. Tomlin, The newsvendor under demand ambiguity: Combining data with moment and tail information, Operations Research, 64 (2016), 167-185.  doi: 10.1287/opre.2015.1454.  Google Scholar

[29]

H. ScarfK. J. Arrow and S. Karlin, A min-max solution of an inventory problem, Studies in the mathematical theory of inventory and production, 10 (1958), 201-209.   Google Scholar

[30]

B. Shen, T. M. Choi and S. Minner, A review on supply chain contracting with information considerations: information updating and information asymmetry, International Journal of Production Research, (2018). doi: 10.1080/00207543.2018.1467062.  Google Scholar

[31]

T. A. Taylor and W. Xiao, Incentives for retailer forecasting: Rebates vs. returns, Management Science, 55 (2009), 1654-1669.  doi: 10.1287/mnsc.1090.1045.  Google Scholar

[32]

J. Wang, R. Zhao and Y. Lan, Incentives for a retailer with two-dimensional asymmetric information, Working paper, Available at SSRN 2443649. Google Scholar

[33]

T. Xiao and J. Shi, Consumer returns reduction and information revelation mechanism for a supply chain, Annals of Operations Research, 240 (2016), 661-681.  doi: 10.1007/s10479-014-1592-8.  Google Scholar

[34]

J. YueB. Chen and M. C. Wang, Expected value of distribution information for the newsvendor problem, Operations research, 54 (2006), 1128-1136.  doi: 10.1287/opre.1060.0318.  Google Scholar

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