Robust purchasing and information asymmetry in supply chains with a price-only contract

Abstract

This article proves that information can be a double-edged sword in supply chains. A simple supply chain is studied that consists of one supplier and one retailer, interacting via a wholesale price contract, where one firm knows the probabilistic distribution of demand and the other only knows the mean and variance. The firm with limited distributional knowledge applies simple robust optimization techniques. It is proved that a firm’s informational advantage is not necessarily beneficial and can lead to a reduction of the firm’s profit, demonstrating the detriment of information. It is shown how the direction of asymmetry, demand variability, and product economics affect both firms’ profits. These results also provide an understanding of how asymmetric information impacts the double-marginalization effect for the cumulative profits of the supply chain in certain cases reducing the effect. The symmetric incomplete informational case, where both firms only know the mean and variance of demand, is also studied and it is shown that it is possible that both firms can benefit from their collective lack of information. Throughout this article, practical guidelines where a supplier or retailer is motivated to share, hide, or seek information are identified.