Coordination with Profit-sharing Contracts in an Assemble-to-order System

Optimal system performance requires the close cooperation among all members in the system. We investigate a decentralized two-stage assemble-to-order system with price-dependent demand. The assembler assembles products with complementary components from multiple suppliers. Each customer has an individual reservation price, which is uniformly distributed. Customers place orders when the product price is below their reservation prices. We compare the price and system profit in the decentralized system with those in the centralized system. The product price is higher and the system profit is lower in the decentralized system and the system profit loss is associated with the number of suppliers in the system. We propose a profit-sharing contract and show that it can effectively coordinate the system and achieve the same optimal system profit as that in the centralized system.