Managing Supply Uncertainty with an Information Market

Abstract

We propose a market-based information aggregation mechanism to manage the supply side uncertainty in the supply chain. In our analytical model, a simple supply chain consists of a group of retailers who order a homogeneous product from two suppliers. The two suppliers differ in their ability to fulfill orders – one always delivers orders and the other fulfills orders probabilistically. We model the supply chain decisions as a Stackelberg game where the supplier who has uncertain reliability decides a wholesale price before the retailers who independently receive signals about the supplier’s reliability determine their sourcing strategies. We then propose an information market to trade binary contracts with payoffs contingent on the supplier’s true reliability. Using a simple uniform demand distribution, we demonstrate that the market-based information aggregation mechanism improves the overall supply chain efficiency.