Design of Truth Telling Quantity Discount Contract under Information Asymmetry

Supply chains are often in an environment where the demand is affected by the retailer’s sales effort and the supplier has no accurate information about the retailer’s cost. In this situation, the retailer’s action of distorting his cost information could damage the efficiency of the supply chain. In order to reduce the resulted impairment, the problem of how to coordinate the retailer’s action using quantity discount contract is studied based on principal-agent theory. The way of how to determine the parameters of the contract is provided. The contract offers more preferential wholesale price to the retailer with lower cost, so that the retailer has the incentive to reveal his private cost information truthfully and the efficiency of the supply chain is improved. Numerical example shows how the parameters in the quantity discount contract change with the retailer’s cost. The impact of the contracts upon the supply chain member’s expected profit is also demonstrated. The results support the conclusion drew from the theoretical analysis.