We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change, and examine whether risk-management tools are more, or less, valuable, in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the supplier's reliability is either high or low and is the supplier's private information. Upon disruption the supplier chooses between paying a penalty to the manufacturer for the shortfall and using backup production to fill the manufacturer's order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of supplier backup production for the manufacturer is not necessarily larger under symmetric information and, for the more reliable supplier type, it could be negative. The manufacturer is willing to pay the most for information when supplier backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.

We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change and examine whether risk-management tools are more or less valuable in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the supplier's reliability is either high or low and is the supplier's private information. On disruption, the supplier chooses to either pay a penalty to the manufacturer for the shortfall or use backup production to fill the manufacturer's order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of supplier backup production for the manufacturer is not necessarily larger under symmetric information; for the more reliable supplier type, it could be negative. The manufacturer is willing to pay the most for information when supplier backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.supply risk, mechanism design, contract, nondelivery penalty

We study a buyer's strategic use of a dual-sourcing option when facing suppliers possessing private information about their disruption likelihood. We solve for the buyer's optimal procurement contract. We show that the optimal contract can be interpreted as the buyer choosing between diversification and competition benefits. Better information increases diversification benefits and decreases competition benefits. Therefore, with better information the buyer is more inclined to diversify. Moreover, better information may increase or decrease the value of the dual-sourcing option, depending on the buyer's unit revenue: for large revenue, the buyer uses the dual sourcing option for diversification, the benefits of which increase with information; for small revenue, the buyer uses the dual sourcing option for competition, the benefits of which decrease with information. Surprisingly, as the reliability of the entire supply base decreases, the buyer may stop diversifying under asymmetric information (to leverage competition), whereas it would never do so under symmetric information. Finally, we analyze the effect of codependence between supply disruptions. We find that lower codependence leads the buyer to rely less on competition. Because competition keeps the information costs in check, a reduction in supplier codependence increases the buyer's value of information. Therefore, strategic actions to reduce codependence between supplier disruptions should not be seen as a substitute for learning about suppliers' reliabilities.

We seek optimal inventory levels and prices of multiple products in a given assortment in a newsvendor model (single period, stochastic demand) under price-based substitution, but not stockout-based substitution. We address a demand model involving multiplicative uncertainty, motivated by market share models often used in marketing. The pricing problem that arises is known not to be well behaved in the sense that, in its deterministic version, the objective function is not jointly quasi-concave in prices. However, we find that the objective function is still reasonably well behaved in the sense that there is a unique solution to the first-order conditions, and this solution is optimal for our problem.

Upselling is offering an additional product to a customer who just made a purchase. Most catalogers and online sellers, in addition to some traditional retailers, use upselling often to clear inventories of slow-moving items. We investigate the pricing and discounting questions for such an item, which we call the promotional product. In our model, an arriving customer may purchase this promotional product or one of the other products that the firm sells. If the customer purchases one of the other products, the promotional product is offered to the customer, possibly with a discount. While deciding whether to offer a discount and, if so, how big a discount to offer, the firm uses the information that the customer has just bought a certain product with a certain price. We investigate how discounting decisions depend on the inventory levels, time, type of pricing policy in use, and the relationship between the customers' reservation prices for the promotional product and the other products (negatively or positively correlated). In particular, we find that if the firm sets prices and discounts dynamically and the customers' reservation prices for the promotional product are negatively correlated with their reservation prices for the product they purchased, then customers are always offered a discount regardless of the inventory levels and time. On the other hand, if the customers' reservation prices for the promotional product are positively correlated with their reservation prices for the product they purchased, then the customer may or may not be offered a discount, depending on the inventory levels and time. Our numerical study shows that the benefit to the firm from using customer purchase information is high when the firm uses a static price, but chooses discounts dynamically. We also find that although dynamic discounting decisions bring modest improvements, setting the price dynamically seems to have a more significant effect on the firm's profits.dynamic pricing, pricing of limited inventories, cross-selling, bundling