Optimal Long-Term Supply Contracts with Asymmetric Demand Information
Dr. Wenqiang XIAO
Associate Professor of Operations Management
Leonard N. Stern School of Business
New York University
We consider a manufacturer selling to a retailer with private demand information arising dynamically over an infinite time horizon. Under a backlogging model, we show that the manufacturer's optimal dynamic long-term contract takes a simple form: in the first period, based on her private demand forecast, the retailer selects a wholesale price and pays an associated upfront fee, and, from then on, the two parties stick to a simple wholesale price contract with the retailer's optimal long-term contract under lost sales combines wholesale prices with options that coordinate the supply chain.