Management Science Research Centre presents:
"Demand Information and Spot Price Information: Supply Chains Trading in Spot Markets"
Associate Professor in the School of Business and Economics, Wilfrid Laurier University
This paper studies the effect of information updating (in both the demand and the spot price) on the members of a two-stage supply chain in the presence of spot market. The supplier first decides the wholesale price. As time progresses, new information becomes available. The manufacturer updates his belief on demand or (and) spot price, and then decides the contract quantity. Due to the correlation between demand and spot price, the new demand information also updates the belief on the spot price, and vice versa. Using a novel method to obtain the posterior bivariate normal distributions, we model the problem with information updating Stackelberg game and derive the unique equilibrium strategies. We then obtain the condition under which the supplier and the manufacturer intend to use a forward contract. Our study shows that improved demand information benefits both the supplier and the manufacturer if the correlation coefficient between the two uncertainties has a small positive value, and hurts the supplier otherwise. However, superior spot price information only benefits the manufacturer and always hurts the supplier. As to which type of information updating facility/expertise to invest in (due to for example financial constraint), our finding suggests that the demand information updating leads to a win-win solution if the manufacturer is moderately risk-averse, or if the manufacturer is sufficiently risk-averse and a good forecaster. For a less risk-averse manufacturer, or sufficiently risk-averse manufacturer with bad forecasting capability, an agreement is never achieved. Literature in this field has focused on demand information only; this paper provides a more complete picture on the impact of asymmetric market information to supply chains.
A light lunch will be served