Supply chain contract mechanism under bilateral information asymmetry

Abstract In this paper, we investigate the problem of designing a mechanism under a bilateral asymmetric information structure. More specifically, we consider a supply chain consisting of one risk-neural manufacturer and one risk-averse retailer, they have private information regarding the manufacturing costs and degree of risk aversion, respectively. We firstly construct a model under the bilateral information asymmetry using the M-V approach. We then provide a wholesale price contract under bilateral information asymmetry to examine if the true information is revealed. We find that the manufacturer and the retailer overstate their information to gain more individual profit. To achieve the coordination, we propose an innovative coordinating contract mechanism, which contains the trading quantity, the transfer payments, and the profit allocation rules. With this coordinating contract, the manufacturer and the retailer announce their true private information and maximize their expected individual profit as well as the supply chain’s profit. We find that the private information of risk aversion degree doesn’t affect the supply chain performance under the coordinating contract. Further, the implementation of the contract is relevant to the two parties’ profits and to the difference between the expected value of information and the true information. Finally, the numerical examples are presented to illustrate the main results.