A principal-agent model in a supplier-led supply chain under asymmetric information

A supply chain relationship with a supplier who is stronger than a manufacturer is considered. The manufacturer purchases custom components from the dominant supplier, and then incurs a processing cost before they can sell the product to end customers where the demand for the product is a random variable with a given continuous distribution. For the supplier, there is asymmetric information about the manufacturer's cost structure which is described as a continuous random variable. This paper constructs a principal-agent model in a supplier-led supply chain to maximize the supplier's profits which include the wholesale profits and the transfer payment from the manufacturer. The proposed model is shown to be a dynamic optimization problem. The optimal wholesale price and transfer payment are obtained by solving the optimization problem based on Pontryagin's maximum principle. The optimal contract under symmetric information is also obtained. Some managerial implications are provided for the supplier contract design in a supplier-led environment. Finally, a numerical example is given to illustrate the effectiveness of the proposed methods.