Capacity Investments in Supply Chain under Asymmetric Production Cost Information

In this paper, we consider a supply chain consisting of two independent agents, a manufacturer and a single supplier, the latter is the only source for a customized component. Two cases are considered. When the manufacturer has complete information on the production cost of the supplier, we offer cost-sharing contracts to coordinate the supply chain. Our analysis demonstrates that the manufacturer who pays more of the install cost will get more profit. When the production cost is private information not known to the manufacturer, the supplier has an incentive to hide it. In this case, the manufacturer will obtain the supplier´s true information by offering a menu of contracts. We derive the optimal quantity of the capacity under asymmetric information and compare it to the situation where the manufacturer has full information.