Manufacturer’s Incentive Strategies in a Dual-Channel Supply Chain with Moral Hazard: A Long-Term Perspective

Abstract

Moral hazard have a non-negligible impact on supply chain sustainability, especially from a long-term perspective. This influence is more complicated in a dual-channel supply chain with free riding. Therefore, it is necessary to explore how manufacturers design multi-period incentive strategies in a dual-channel supply chain to deal with moral hazard problems from retailers. In this study, we built a game theory model that contains a retailer (she) who is delegated by a manufacturer (he) to sell products in her offline and online channels and to provide experience services in a physical store. The retailer has the option of exerting effort when providing experience services to boost demand. We explored and compared the manufacturer’s strategies that cover a time horizon of multiple periods under two circumstances: full information and repeated moral hazard. The following conclusions were drawn from this study. In the repeated moral hazard game, the incentive constraints of the retailer are only related to her current and the next-period profits and independent from the profits in other periods. Moreover, the incentive strategies in each period are affected by the historical information in the previous period, while the strategies under information symmetry are not affected by history. Specially, the manufacturer can induce effort by charging an up-front payment from the retailer in the previous period and then returning a utility based on the achieved demand. Therefore, the manufacturer can postpone the payment of incentive costs and shift the risk to the next period. Furthermore, the manufacturer’s incentive strategies are also affected by the free-riding effect between channels. That is, compared with the low-state transfer payment, the high-state transfer payment was found to be more sensitive to free riding.