Management and Marketing - Research Publications
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ItemIncentive-Compatible in Dominant Strategies Mechanism Design for an Assembler under Asymmetric Information(Wiley, 2019-02-01)Assembly systems, in which various components are sourced from multiple suppliers and assembled into the final product, which is sold to external customers, are found in a variety of industries. In many practical settings, the assembler possesses incomplete information regarding the marginal cost of each supplier. This lack of complete information poses a challenge for the assembler in designing contract mechanisms. In this paper, we investigate the assembler's contract design problem by proposing a contracting mechanism that can significantly outperform an alternative mechanism that was previously presented in the literature, especially when the uncertainty regarding customer demand is significant. Our mechanism is incentive compatible in dominating strategies (ICDS) and maximizes the assembler's expected profit while ensuring that every supplier truthfully reveals their own production cost, regardless of how the other suppliers might behave. In this ICDS mechanism, the assembler orders the same number of components from each supplier. This “balanced ordering” property does not hold for the alternative mechanism from the literature. Finally, to simplify the proposed ICDS mechanism, we introduce a hybrid mechanism, under which the complexity of the contract offered to a given supplier depends on the importance of that supplier to the assembler's overall profit. We conduct a set of numerical experiments to demonstrate that, in many cases, this proposed hybrid mechanism provides performance close to that of the optimal mechanism, and can significantly outperform the alternative mechanism from the literature.
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ItemInternal and External Reference Effects in a Two-Tier Supply Chain(Elsevier, 2018-06-16)We study a two-tier supply chain with a newsvendor retailer that has an internal reference effect related to its own profit as well as an external reference effect centered on the profit of the supplier. We show that the internal and external reference effects in isolation can have opposite effects on the wholesale price set by a supplier who has full knowledge on the retailer's ordering bias. The internal reference effect, which is driven by the relative disutility from ex-post inventory error, causes the supplier to increase the wholesale price, whereas the external effect, which results from disadvantageous profit inequity, causes the supplier to decrease the wholesale price. While the internal reference effect can achieve supply chain coordination for items with a low profit margin, the external reference effect improves efficiency for high profit margin products, but never achieves coordination. When the retailer's ordering behavior is influenced by both reference effects, then the interaction can improve efficiency and lead to an equilibrium where the supply chain is coordinated. We find that the relative impact of each reference effect is highly dependent upon the profit margin. We study these equilibria with full information as well as for a supplier who is naïve to the retailer's behavioral biases and compare these results to derive insights into the behavioral management of supply chains.
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ItemEquilibrium evolution in a two-echelon supply chain with financially constrained retailers: The impact of equity financing(Elsevier, 2017-03)This paper considers a two-echelon supply chain that has a supplier and two capital constrained retailers and in which the retailers compete in a Cournot fashion. We study the impact of external financing on the players’ optimal decisions and supply chain performance. We show that as competition intensity increases, the supplier (as the Stackelberg leader) may consider merging with one retailer to avoid double marginalization. Yet, the deselected retailer may utilize external financing to return to the supply chain. We explicitly model the evolution of equilibrium scenarios and identify the conditions under which the supplier may prefer to provide trade credit to only one retailer and the other retailer may use external financing. We also carry out extensive sensitivity analyses with respect to a retailer’s capital structure and the retailer’s competition intensity.
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ItemCompetition Under Diseconomies of Scale: The Role of Subcontracting and Single-sourcing Commitment(Wiley, 2018-02)This article studies a supplier competition model in situations with flexible resources where suppliers face diseconomies of scale. Under such a situation, it is generally believed that a buyer may split an order across different suppliers; and even if the buyer chooses only one supplier, the winning supplier may subcontract part of the work to the others. My results, however, show that the buyer always prefers to commit to single-sourcing prior to running a procurement auction. This is because such commitment eliminates the "assurance" of getting a positive order from the buyer, thus intensifying supplier competition. I also find that subcontracting may be beneficial (detrimental) to the buyer if the subcontract is determined by the winning (losing) supplier of the bidding game. Finally, I show that, for the case with linear costs, the buyer is always better off when subcontracting is considered.
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ItemSupplier Competition with Option Contracts for Discrete Blocks of Capacity(INFORMS, 2017)When a firm faces an uncertain demand, it is common to procure supply using some type of option in addition to spot purchases. A typical version of this problem involves capacity being purchased in advance, with a separate payment made that applies only to the part of the capacity that is needed. We consider a discrete version of this problem in which competing suppliers choose a reservation price and an execution price for blocks of capacity, and the buyer, facing known distributions of demand and spot price, needs to decide which blocks to reserve. We show how to solve the buyer's (combinatorial) problem efficiently and also show that suppliers can do no better than offer blocks at execution prices that match their costs, making profits only from the reservation part of their bids. Finally we show that in an equilibrium the buyer selects the welfare maximizing set of blocks.
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ItemSupply Contract Design for Competing Heterogeneous Suppliers under Asymmetric Information(Wiley-Blackwell, 2015)This study considers a supply chain with two heterogeneous suppliers and a common retailer whose type is either low-volume or high-volume. The retailer's type is unknown to the suppliers. The flexible supplier has a high variable cost and a low fixed cost, while the efficient supplier has a low variable cost and a high fixed cost. Each supplier offers the retailer a menu of contracts. The retailer chooses the contract that maximizes its expected profit. For this setting, we characterize the equilibrium contract menus offered by the suppliers to the retailer. We find that the equilibrium contract menus depend on which supplier-retailer match can generate the highest supply chain profit and on how much information rent the supplier may need to pay. An important feature of the equilibrium contract menus is that the contract assigned to the more profitable retailer will coordinate the supply chain, while the contract assigned to the less profitable retailer may not. In addition, in some circumstances, the flexible supplier may choose not to serve the high-volume retailer, in order to avoid excessive information rent.
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ItemTime-Based Procurement(Elsevier, 2015)This study investigates the design of a time-based procurement contract when a supplier possesses private information about intrinsic completion time and may choose to exert time reduction effort. We first derive the optimal (complex) contract for the buyer, and then evaluate the performance of a (simple) fixed-price and fixed-time (FPFT) contract. Our analysis shows that the structure of the optimal time-based contract and the performance of an FPFT contract depend largely on time reduction forms. Specifically, if time reduction follows a multiplicative model, the optimal contract induces the intrinsically slow supplier to reduce time, and offers a fixed payment to the intrinsically fast supplier. This result is opposite to what could occur when time reduction follows an additive model. We also show that, in a specific multiplicative model, the FPFT contract achieves at least eight-ninth of the available surplus for the buyer, whereas the performance of an FPFT contract deteriorates dramatically in an additive model. In response to this underperformance, we then propose an enhanced linear contract, and demonstrate that, using this contract, the buyer loses no more than one-sixteenth of the available surplus. Our results shed light on the important effect of time reduction forms on time-based contract design.
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ItemDesigning Multi-Attribute Procurement Mechanisms for Assortment Planning(John Wiley & Sons, 2015-06)This research investigates how to design procurement mechanisms for assortment planning. We consider that a retailer buys directly from a manufacturer who possesses private information about the per-unit variable cost and per-variety setup cost. We first develop a screening model to assist the retailer in integrating assortment planning into supply chain contracting processes when only one manufacturer is available. We demonstrate that the screening mechanism is optimal among all feasible procurement strategies. When there are multiple competing manufacturers, we propose a supply contract auctioning mechanism and evaluate its performance. In this mechanism, the retailer announces a contract menu and the manufacturer that bids the highest upfront fee paid to the retailer wins the auction. The winner then chooses and executes a contract from the contract menu. We show that when the retailer uses the optimal screening contract menu as the object of the auction, it achieves the optimal procurement outcome if the screening contract menu does not pay rent to any manufacturer type. This finding sheds light on the connection between screening and auction mechanisms when there exists multi-dimensional private information.