Channel selection and fulfillment service contracts in the presence of asymmetric service information

Abstract In this paper, we explore the effect of asymmetric service information, including service cost information and service quality information, on fulfillment service contract in the presence of channel selection and pricing decisions in a one-principal-one-agent relationship. We characterize the service contract terms as well as the pricing and channel selection decisions under four scenarios, depending on whether service cost information or service quality information is private. The optimal contract terms critically depend on the unit operation cost of the offline retail channel. If service quality is contractable, the firm pays information rent for private cost information, and its size only depends on the contract terms of the high-cost service provider. When service quality is not contractable, asymmetric service quality information reduces the overall operational efficiency only if service cost is also private information. We also numerically verify the influence of asymmetric information on the firm's optimal decisions and compare the optimal results for different kinds of service contracts. The main finding of our study is that channel decisions can be used by the retail firm to weaken the information advantage of the service provider. Therefore, when designing service contract, the firm should carefully consider the interaction between channel structure and service information availability.