Mechanism design in a supply chain with ambiguity in private information

Abstract

This paper considers a two-echelon supply chain with one supplier and one retailer. The retailer holds private information on the stochastic demand, and the supplier knows neither the market information nor its prior distribution. Two decision making criteria based on the generalized lexicographic preference are proposed to the supplier: the profit criterion and the regret criterion. Our analyses show that the profit criterion always coordinates the supply chain, while the regret criterion does not. If the market state is low, the profit criterion generates higher profit for the supplier than the regret criterion does, and vise versa. In both criteria, we show that the supplier's regret is bounded by both the range of the market state and the volatility of the demand. We further show that, the supplier should cooperate with the retailer with full demand information if the differences between market states are large enough, while selling the product by himself is better if the differences between market states are small enough.