Supply chain contracting considering the cost structure between capacity and quality under information asymmetry

Abstract

This paper studies the supply chain contracting problem to ensure on-time delivery of high-quality products from the supplier to the buyer. The notions of complements and substitutes are utilized to describe the correlation among the supplier’s production cost, production capacity, and product quality, i.e., the cost structure between capacity and quality. A principal-agent model is proposed to solve the supply chain contracting considering the cost structure between capacity and quality under information asymmetry. We derive the conditions for complements and substitutes and the optimal menu of contracts. Our results indicate that the cost structure plays an important role in supply chain contracting.