An advanced buyback contract and information asymmetry

This paper proposes a novel advanced buyback (ABB) contract to coordinate a supply chain that consists of one supplier and one retailer. The contract stipulates when a buyback contract is executed and the amount of buyback. We model the interaction of supply chain participants as a Stackelberg game and incorporate the participants’ reservation profits into the game to examine the effectiveness of the ABB contract with complete information. We demonstrate that the ABB contract can conveniently coordinate the supply chain, flexibly allocate profit, and facilitate avoidance of the aggressive overordering behavior of the retailer. This model is extended to the situation of information asymmetry, where the retailer holds private information about the cost of sales in discrete or continuous states. The optimal strategies of the supply chain and the participants are derived. Information asymmetry can damage the supplier but be beneficial to the retailer. The condition under which the supply chain achieves coordination is clarified. A numerical simulation is performed to verify and extend the results of the theoretical analysis. We show that the ABB contract always outperforms the ordinary wholesale price and buyback contracts with complete information. Supply chain coordination is more likely to be achieved if the demand variability is lower when weighing whether to share private information. Our findings can explain why retailers always have an incentive to inflate their cost of sales.