Optimal Long-Term Supply Contracts with Asymmetric Demand Information

36 Pages Posted: 29 Mar 2013 Last revised: 24 Feb 2016

See all articles by Ilan Lobel

Ilan Lobel

New York University (NYU)

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: February 23, 2016

Abstract

We consider a manufacturer selling to a retailer with private demand information arising dynamically over an infinite time horizon. Under a backlogging model, we show that the manufacturer's optimal dynamic long-term contract takes a simple form: in the first period, based on her private demand forecast, the retailer selects a wholesale price and pays an associated upfront fee, and, from then on, the two parties stick to a simple wholesale price contract with the retailer's chosen price. Under a lost sales model, we show that the structure of the optimal long-term contract combines a menu of wholesale pricing contracts with an option that, if exercised by the retailer, reduces future wholesales prices in exchange for an immediate payment to the manufacturer.

Keywords: supply chain contracting, dynamic information asymmetry, inventory, dynamic mechanism design

JEL Classification: D82, C73

Suggested Citation

Lobel, Ilan and Xiao, Wenqiang, Optimal Long-Term Supply Contracts with Asymmetric Demand Information (February 23, 2016). Available at SSRN: https://ssrn.com/abstract=2240450 or http://dx.doi.org/10.2139/ssrn.2240450

Ilan Lobel (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

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