The Optimal Price Decision And Incentive Contract Design Under Asymmetric Cost Information

An important challenge in supply chain management is to better match supply and demand. Due to supply shortages of products, some companies choose a more flexible sourcing strategy, i.e., sourcing from emergent suppliers when the main supplier can't provide sufficient materials. However, manufacturers often have no access to information about quality, production cost and delivery time of the products offered by the emergent suppliers. Consequently, the emergent suppliers tend to conceal their production costs so as to earn more profits. Therefore, it's necessary for manufacturers to design an incentive contract with an intention of encouraging the emergent suppliers to reveal the private information and make right decisions. In addition, when manufacturers choose local SMEs as emergency suppliers, the product quality appears to be relatively low. Thus, only a part of customers will purchase alternative commodities made of products offered by emergent suppliers. In this situation, in order to motivate more customers to buy alternative commodities, manufacturers need to adopt a more effective pricing strategy. Given the asymmetric cost information about emergent suppliers and different pricing strategies(uniform pricing or differential pricing), this thesis will examine how manufacturers jointly optimize the sale prices of commodities and the incentive contracts as well as comparing the impact of different pricing strategies on performance of each party.This study shows that the emergent supplier will truthfully tell its own cost information under optimal incentive contract. In the low-production-cost scenario, the emergent supplier will choose a shorter delivery time, and the manufacturer also offers more payment accordingly. In addition, the presence of the emergency supplier will increase the manufacturer's profit and reduce the main supplier's profit. Through analyzing the differences in differential pricing and uniform pricing, it's derived that when the manufacturer use the differential pricing strategy, it will gain more profits from emergency suppliers. Hence the manufacturer expects to reduce the order quantity from the emergent supplier and its overall expected profits will increase. Finally, the numerical analysis indicates that if the manufacturer use the differential pricing strategy, it will benefit more from a lower production cost of emergent suppliers or a higher customer sensitivity of alternative products.