Information Asymmetry and Minimum Quality Standards in Supply Chain Oligopolies

Abstract

This chapter begins Part II of this book with Part II focusing on information asymmetry in product quality. We present a supply chain network model with information asymmetry in product quality. The competing profit-maximizing firms with multiple manufacturing plants know the quality of the product that they produce but consumers, at the demand markets, are aware only of the average quality. The framework is relevant to products ranging from certain foods to pharmaceuticals to durables such as automobiles. We propose an equilibrium model and its dynamic counterpart and show how minimum quality standards can be incorporated. Qualitative results and an algorithm are presented, along with convergence results. The numerical examples, with sensitivity analysis, provide valuable insights for firms, consumers, as well as policy-makers, who impose the minimum quality standards.