Considering asymmetrical manufacturing cost information in a two-echelon system that uses price-only contracts

Consider a basic “price-only” supply chain interaction in which the “players” are a manufacturer and a retailer. The manufacturer sets the wholesale price ($w/unit) of a product she supplies to a retailer, who in turn sets the retail price ($p/unit) at which he sells to the consumers. The product's demand curve is a function of p. The players select to play one of several non-cooperative games such as the manufacturer-Stackelberg game. How should the players set their prices w and p? Most existing studies assume information symmetry i.e., the cost and market parameters are known equally and perfectly to both players. In reality, the retailer's knowledge of the manufacturing cost c is often controlled by the manufacturer. This paper considers explicitly the asymmetry of knowledge in c. This approach reveals interesting and surprising deviations from earlier symmetrical-c-knowledge results. Moreover, the approach also ameliorates some of the internal inconsistencies within the symmetric-information framework. We also show how the effect of knowledge asymmetry varies with the shape of the demand curve and with the degree of relative dominance between the players. We find that under a linear demand curve a manufacturer should overstate c, which is an intuitively expected result. However, under an iso-elastic demand curve she benefits herself and the entire system by understating c, which is counter-intuitive. Also, under asymmetric c-knowledge, the simultaneous decision (or “vertical Nash”) game becomes non-viable under a linear demand curve, but the game becomes quite viable and desirable under an iso-elastic demand curve.

Acknowledgements

The authors are indebted to the references for their very constructive and motivating comments which have led to a substantially improved final manuscript. This research is partially supported by a Hong Kong Research Grants Council Competitive Earmarked Research Grant (project number CityU 1128/02H).

Notes

¹If D _p is iso-elastic and α ≤ 2, the solution becomes meaningless.