Mechanism Design for Capacity Planning Under Dynamic Evolutions of Asymmetric Demand Forecasts

This paper investigates the role of time in forecast information sharing and decision making under uncertainty. To do so, we provide a general framework to model the evolutions of forecasts generated by multiple decision makers who forecast demand for the same product. We also model the evolutions of forecasts when decision makers have asymmetric demand information and refer to it as the Martingale Model of Asymmetric Forecast Evolutions. This model helps us study mechanism design problems in a dynamic environment. In particular, we consider a supplier's principal's problem of eliciting credible forecast information from a manufacturer agent when both firms obtain asymmetric demand information for the end product over multiple periods. The supplier uses demand information to better plan for a capacity investment decision. When the supplier postpones building capacity and screening the manufacturer's private information, the supplier and the manufacturer can obtain more information and update their forecasts. This delay, however, may increase respectively, decrease the degree of information asymmetry between the two firms, resulting in a higher respectively, lower cost of screening. The capacity building cost may also increase because of a tighter deadline for building capacity. Considering all such trade-offs, the supplier has to determine i when to stop obtaining new demand information and build capacity, ii whether to offer a screening contract to credibly elicit private forecast information or to determine the capacity level without information sharing, iii how much capacity to build, and iv how to design the overall mechanism so that both firms benefit from this mechanism. This paper provides an answer to these questions. In doing so, we develop a new solution approach for a class of dynamic mechanism design problems. In addition, this paper provides a framework to quantify the option value of time for a strategic investment decision under the dynamic evolutions of asymmetric forecasts. This paper was accepted by Yossi Aviv, operations management.

[1]  Christopher S. Tang,et al.  The Value of Information Sharing in a Two-Level Supply Chain , 2000 .

[2]  Yossi Aviv,et al.  The Effect of Collaborative Forecasting on Supply Chain Performance , 2001, Manag. Sci..

[3]  Özalp Özer,et al.  Promised Lead-Time Contracts Under Asymmetric Information , 2008, Oper. Res..

[4]  J. Aitchison,et al.  The Lognormal Distribution. , 1958 .

[5]  Yossi Aviv,et al.  Gaining Benefits from Joint Forecasting and Replenishment Processes: The Case of Auto-Correlated Demand , 2001, Manuf. Serv. Oper. Manag..

[6]  Albert Y. Ha,et al.  Contracting and Information Sharing Under Supply Chain Competition , 2008, Manag. Sci..

[7]  Erica L. Plambeck,et al.  Performance-Based Incentives in a Dynamic Principal-Agent Model , 2000, Manuf. Serv. Oper. Manag..

[8]  Graham A. Davis,et al.  Investment under uncertainty: Avinash K Dixit and Robert S Pindyck Princeton University Press, Princeton, NJ, 1994, xiv + 468 pp (hardcover), ISBN 0-691-03410-9 , 1996 .

[9]  Tetsuo Iida,et al.  Competition and Cooperation in a Two-Stage Supply Chain with Demand Forecasts , 2010, Oper. Res..

[10]  Özalp Özer,et al.  Integrating Replenishment Decisions with Advance Demand Information , 2001, Manag. Sci..

[11]  Terry A. Taylor,et al.  Does a Manufacturer Benefit from Selling to a Better-Forecasting Retailer? , 2010, Manag. Sci..

[12]  Özalp Özer,et al.  Trust in Forecast Information Sharing , 2009, Manag. Sci..

[13]  Vasiliki Skreta,et al.  Optimal Interventions in Markets with Adverse Selection , 2010 .

[14]  Li Chen,et al.  Information Sharing and Order Variability Control Under a Generalized Demand Model , 2009, Manag. Sci..

[15]  Yossi Aviv,et al.  On the Benefits of Collaborative Forecasting Partnerships Between Retailers and Manufacturers , 2007, Manag. Sci..

[16]  Stephen C. Graves,et al.  Strategic Safety Stocks in Supply Chains with Evolving Forecasts , 2009, Manuf. Serv. Oper. Manag..

[17]  J. Tirole Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning , 2012 .

[18]  Stephen C. Graves,et al.  TWO-STAGE PRODUCTION PLANNING IN A DYNAMIC ENVIRONMENT , 1985 .

[19]  Brian Tomlin,et al.  To wait or not to wait: Optimal ordering under lead time uncertainty and forecast updating , 2009 .

[20]  Roger B. Myerson,et al.  Optimal Auction Design , 1981, Math. Oper. Res..

[21]  Morris A. Cohen,et al.  Measuring Imputed Cost in the Semiconductor Equipment Supply Chain , 2003, Manag. Sci..

[22]  J. Mirrlees An Exploration in the Theory of Optimum Income Taxation an Exploration in the Theory of Optimum Income Taxation L Y 2 , 2022 .

[23]  Gérard P. Cachon,et al.  Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain , 2001, Manag. Sci..

[24]  日野 寛三,et al.  対数正規分布(Lognormal Distribution)のあてはめについて , 1994 .

[25]  Bruno Jullien,et al.  Participation Constraints in Adverse Selection Models , 2000, J. Econ. Theory.

[26]  D. Heath,et al.  Modelling the evolution of demand forecasts with application to safety stock analysis in production distribution systems , 1994 .

[28]  L. Beril Toktay,et al.  The Value of Collaborative Forecasting in Supply Chains , 2011, Manuf. Serv. Oper. Manag..

[29]  R. Zeckhauser,et al.  Optimal Selling Strategies: When to Haggle, When to Hold Firm , 1983 .

[30]  Vasiliki Skreta Sequentially Optimal Mechanisms , 2000 .

[31]  Stephen C. Graves,et al.  A Dynamic Model for Requirements Planning with Application to Supply Chain Optimization , 1998, Oper. Res..

[32]  Mustafa Akan,et al.  Revenue management by sequential screening , 2015, J. Econ. Theory.

[33]  Giovanni Maggi,et al.  On Countervailing Incentives , 1995 .

[34]  Fangruo Chen Decentralized supply chains subject to information delays , 1999 .

[35]  Hyoduk Shin,et al.  Do Firms Invest in Forecasting Efficiently? The Effect of Competition on Demand Forecast Investments and Supply Chain Coordination , 2010, Oper. Res..

[36]  Özalp Özer,et al.  Information Acquisition for Capacity Planning via Pricing and Advance Selling: When to Stop and Act? , 2009, Oper. Res..

[37]  Alp Muharremoglu,et al.  Inventory Management with Advance Supply Information , 2010 .

[38]  Eduardo S. Schwartz,et al.  Investment Under Uncertainty. , 1994 .

[39]  R. Myerson Incentive Compatibility and the Bargaining Problem , 1979 .

[40]  Özalp Özer,et al.  Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information , 2006, Manag. Sci..

[41]  Peter L. Jackson,et al.  On the Equilibrium Behavior of a Supply Chain Market for Capacity , 2013, Manuf. Serv. Oper. Manag..

[42]  Izak Duenyas,et al.  Purchasing Under Asymmetric Demand and Cost Information: When Is More Private Information Better? , 2011, Oper. Res..

[43]  Game-Theoretic Analysis of Cooperation Among Supply Chain Agents: Review and Extensions , 2006 .

[44]  Hao Zhang,et al.  A Dynamic Principal-Agent Model with Hidden Information: Sequential Optimality Through Truthful State Revelation , 2008, Oper. Res..

[45]  Warren H. Hausman,et al.  Sequential Decision Problems: A Model to Exploit Existing Forecasters , 1969 .

[46]  Warren H. Hausman,et al.  Multiproduct Production Scheduling for Style Goods With Limited Capacity, Forecast Revisions and Terminal Delivery , 2015 .

[47]  Lawrence M. Wein,et al.  Analysis of a Forecasting-Production-Inventory System with Stationary Demand , 2001, Manag. Sci..