The implication of capacity reservation contracts in assembly system with asymmetric demand information

Abstract

This paper investigates an assembly system that consists of one assembler and two suppliers who produce complementary components. The assembler possesses some private demand information that is unobservable to the upstream suppliers, and the two suppliers have to choose their capacity reservations ahead of the selling season. To induce credible vertical information sharing, we design three capacity reservation contracts: the price-quantity contract, the price-only contract and the hybrid price-quantity and price-only contract, so as to identify how the firms’ equilibrium reservation strategies and pay-offs react under different contract schemes. The results show that the assembler obtains the highest pay-off under either the price-only contract or the hybrid contract, which is determined by whether the private demand information or the demand fluctuation is sufficiently high. The suppliers’ optimal contract types are further influenced by their decision sequence. In particular, the supplier who makes decision earlier prefers the hybrid contract, while the supplier who makes decision later prefers any of the three contracts. The supply chain generates the highest pay-off from either the price-quantity contract or the hybrid contract.

Keywords:

• assembly system
• capacity reservation
• asymmetric demand information
• game theory

Acknowledgements

The authors sincerely thank the editor in chief Alexandre Dolgui and four anonymous reviewers for their constructive comments and suggestions to improve the paper. The authors have also benefited from the support from Youth Foundation for Humanities and Social Sciences of Ministry of Education of China (14YJC630041), China Post doctoral Science special Foundation (2014T70741) and National Natural Science Foundation of China (71402126, 71472069).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. For ease of exposition, we denote the supplier who moves first as supply leader and the other supplier as supply follower.

Additional information

Funding

This work was supported by Youth Foundation for Humanities and Social Sciences of Ministry of Education of China [14YJC630041], China Post doctoral Science special Foundation [2014T70741], and National Natural Science Foundation of China [71402126, 71472069].