Contracting under uncertain capacity

Abstract

In this paper, we develop a two-stage supply-chain in which a supplier with uncertain capacity sells to a retailer facing a Newsvendor problem. We analyze the centralized system where both partners take their decisions to optimize the expected system profit and the decentralized system where they make decisions individually. We show that, in a framework of Stackelberg equilibrium, the decentralized model is less efficient than the centralized model and we propose a buy-back contract that coordinates the system.