Optimal contracts in two-echelon supply chain under asymmetric information and nonlinear demand

The challenge for supply chain management is to create appropriate supply chain contracts so as to optimize the system performance. To examine the role of asymmetric information in a two-echelon supply chain system and derive supply chain contracts to deal with existing asymmetric information, a two level supply chain model including one supplier and one retailer under the demand of price elasticity is developed. By using the principal-agent principle and the optimal control theory, three types of supply chain contract, i. e., a wholesale pricing contract, a two-parameter linear and a two-parameter nonlinear contracts are obtained. In these contracts, the supplier has asymmetric information about the retailer cost structure. Simulation results show that the two-parameter contracts are more effective strategies to achieve supply chain coordination.