Capacity manipulation and menus of two part tariff contract in supply chain

Abstract

In a decentralized supply chain, raw material supply uncertainty, phantom orders of downstream firm as well as huge investment sunk costs leads to supplier's production capacity manipulation behavior. A supply chain consisting of a supplier and a retailer who faces a newsvendor problem is considered. The impact of supplier's production capacity manipulation on retailer's purchase decision is discussed. The retailer can adopt a menu of two part tariff contract regarding the terms of trade and capacity. Both supplier and retailer have prior belief about counterpart decision behavior. Then, we construct menus of two part tariff contract offered by the retailer to the supplier who has production capacity manipulation and type dependent reservation profits. Our results show that when capacity difference between type H supplier and type L supplier is higher than a critical threshold, the retailer offers two kinds of optimal menus of two part tariff contract in view of reservation profits difference between the type H supplier and type L supplier, and that both supplier and retailer's prior belief about counterpart decision behavior affect optimal menus of two part tariff contract. Finally, a case study shows our conclusions.