Bargaining Power Choices with Moral Hazard in a Supply Chain

Abstract

A supply chain contract is established using a dynamic, Nash bargaining game which determines the optimal bargaining power allocation for the manufacturer, retailer, and society in an environment affected by moral hazard and irreversible investment. The results found that the manufacturer’s choice was to hold all bargaining power; however, due to the remaining information problem, the retailer still had a profit; in contrast, the retailer was only willing to give up bargaining power if the manufacturer’s profit was reserved. The optimal bargaining power allocation was found to be strongly related to the ability to convert and monitor technology, with the bargaining power gradually shifting to the manufacturer as the technology improved. A numerical simulation is given to examine the theoretical results.