Double moral hazard in a supply chain with consumer learning

  • Authors:

  • Jianheng Zhou;Xia Zhao;Ling Xue;Vidyaranya Gargeya

  • Affiliations:

  • Glorious Sun School of Business and Management, Donghua University, China;Bryan School of Business and Economics, University of North Carolina at Greensboro, United States;Fogelman College of Business and Economics, University of Memphis, United States;Bryan School of Business and Economics, University of North Carolina at Greensboro, United States

  • Venue:
  • Decision Support Systems
  • Year:
  • 2012

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Abstract

When an innovative product is introduced into the market, consumers are often uncertain about the product value. Over time they may learn the value of product. This paper studies the impact of consumer learning on the firms' marketing efforts and revenue sharing strategies in a supply chain that sells an innovative product to consumers over multiple periods. Both the supplier and the retailer can exert marketing efforts to influence consumers' beliefs about the product and improve the product demand. Because the supplier and the retailer are independent entities with self-interested objectives, double moral hazard exists in the supply chain. We find that the supplier and retailer exert more marketing efforts in the presence of consumer learning but the marketing efforts decrease as consumers learn more about the product. We also examine the revenue-sharing strategies and find that supplier shares more revenue to the retailer when they cooperate for a longer time horizon. The total profit of the supply chain may be higher when there is information asymmetry between the supplier and retailer. This finding suggests that information sharing is not always beneficial to improve supply chain coordination.