Optimal reservation pricing strategy for a fashion supply chain with forecast update and asymmetric cost information

Abstract

We address the reservation pricing problem for a two-echelon fashion supply chain in which the downstream manufacturer with private information on its operations cost (low or high type) reserves the capacity for a critical component from the upstream supplier before placing the final order. We consider the case when the demand forecast is partially updated. We find that a novel menu of reservation contracts containing the unit reservation fee with reservation quantity and final order could induce the manufacturer to reveal its operations cost information truthfully. We also show that the supplier should require less capacity reservation and charge a lower unit reservation fee if it has asymmetric information about the manufacturer’s operations cost. Finally, we analyse the effects of forecast update, and our results indicate that: (i) the supplier benefits from forecast update because the optimal reservation pricing strategy is designed to reveal the true information and meanwhile induce a higher capacity reservation; and (ii) a greater amount of forecast update decreases the supply chain deficit and increases the supplier’s agency cost.

Keywords:

• supply chain management
• pricing
• capacity reservation
• revelation mechanism
• forecast update
• asymmetric information

Acknowledgements

We would like to sincerely thank the associate editor and the two anonymous referees for their helpful suggestions and insightful comments, which have significantly improved the quality of this paper. This research was supported in part by: (i) The National Natural Science Foundation of China [grant numbers 71201084, 71371093] and China National Funds for Distinguished Young Scientists [grant number 71425001]; (ii) Humanities and Social Science Project of Chinese Ministry of Education [grant number 11YJC630250]; (iii) Specialized Research Fund for the Doctoral Program of Higher Education [grant number 20113219120028]; (iv) The Fundamental Research Funds for the Central Universities [grant number 30920140132001]; (v) The Research Fund for the Young Faulty of School of Economics and Management NJUST [grant number JGQN1402]; and (vi) The postdoctoral fellowship scheme at The Hong Kong Polytechnic University.

Notes

1. In this paper, a fashion supply chain refers to the supply chain system which produces and sells a fashionable product.

2. Note that with the goal of deriving more analytical closed form results, we follow the literature and employ the bi-types of manufacturer scenario in this study. If we extend it to the case with ‘multiple types’ of manufacturer, we need to add additional monotonicity constraints while this would make the analysis even more complex. We hence postpone it to future research.

3. We distinguish the decision variables and equilibrium profits from the symmetric information setting through the placement of ‘’ above the corresponding variables and profits.

4. We denote this case by the superscript ‘N’ throughout this study.

5. The specific values of parameters are chosen to guarantee that the basic model assumptions and sufficient condition in Corollary 2 are satisfied. We have tested a lot of other cases and obtain similar observations, implying that the main findings are robust.