Purchasing Under Asymmetric Demand and Cost Information: When Is More Private Information Better?

Abstract

We study a supply chain consisting of one supplier and one OEM (original equipment manufacturer). The OEM faces stochastic demand for a final product that requires assembly of two major components, one of which is procured exclusively from the supplier. In the absence of competition, the supplier is able to make a take-it-or-leave-it offer to the OEM in the form of a menu of price-quantity contracts. The OEM possesses private information across two dimensions: (1) demand forecasts about the final product, and (2) production cost of the in-house component. Both pieces of information are relevant to the total supply chain profit, thus affecting the supplier's optimal offer. By initially assuming an exogenous information structure, we characterize the supplier's optimal contract menu for a simple case and demonstrate that more dimensions of asymmetric information are not always preferable for the OEM but could be beneficial for the supply chain. We subsequently examine whether this preference for one less dimension of private information implies disclosure of private information to the supplier when the information structure is endogenized. Our results indicate that if OEMs that are indifferent between disclosing and keeping information private choose to disclose it, disclosure of any verifiable information from all OEMs is always an equilibrium, whereas nondisclosure might fail to be an equilibrium. We also consider the possibility of the OEM and the supplier contracting at the ex-ante stage, i.e., before the OEM observes his private information. When both dimensions of the OEM's private information are verifiable and the cost of disclosing information is small enough, an ex-ante agreement on information disclosure is always possible; otherwise its feasibility depends on the problem parameters.

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“…Allowing imperfect correlation between supplier reliability and its cost, or extending information asymmetry to backup production, would require solving a multi-dimensional screening problem. Such problems have been solved for rather few, special cases (see Kostamis and Duenyas, 2007). We leave the study of this problem to future research as well.…”

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