Game-Theoretical Model Of Buyer-Supplier Relation With Random Audit

In a supply chain, the difference of responsibilities and interestsamong companies results in supply chain inefficiency and great loss. Acoordination mechanism is needed to integrate the distant goals of supplychain members.Information asymmetry is a generally existing problem in today’sbusiness world. In order to mitigate the adverse effect of informationalasymmetries, modern companies often establish long-term “partnering”relations aiming to make all cost information transparent to the otherparty. The resulting contracts may involve profit-sharing agreements. Anecessary condition for profit-sharing is open-book pricing withassociated audit rights. Without the complete and truthful costinformation, it is virtually impossible to agree on a profit-sharing ratio.Supplier audits are carried out to verify the reported costs of the supplier.An effective audit related to the buyer’s internal control system serves asa mechanism to ensure that both costs and quality of the product or service provided by their suppliers meet the required standard.This thesis establishes and analyzes the game-theoretical modelswith audit which involve pure strategy and mixed strategy respectively,based on principal-agent theory and signaling game theory. At first weestablish the signaling game model with audit and derive the conclusionof optimal equilibrium which is reached when the amount of penalty islarge enough; we then present a profit-sharing contract with a randomsupplier audit in a game-theoretical setting which adopts a mixed strategy,and demonstrate that the larger the penalty is or the smaller the cost of theaudit is, the more frequently the supplier will choose to be truthful; in theend we prove that the buyer’s payoff approaches that of the first-bestresult due to the aforementioned variation of contract parameters,according to the comparison with the equilibrium under full information.