Punitive Policies to Combat Misreporting in Dynamic Supply Chains

Wholesale price contracts are known to be associated with double marginalization effects, which prevent supply chains from achieving their true market share. In a dynamic setting under information asymmetry, these inefficiencies manifest in the form of misreporting of the market potential by the manufacturer to the supplier, again leading to the loss of market share. We pose the dynamics of interaction between the supplier and manufacturer as the Stackelberg game and develop theoretical results for optimal punitive strategies that the supplier can implement to ensure that the manufacturer truthfully reveals the market potential in the single-stage setting. Later, we validate these results through the randomly generated, Monte-Carlo simulation based numerical examples.