Spring 2013 Seminar Series

DATE: February 28th
LOCATION: E51-315
TIME: 4:15pm
Reception immediately following

SPEAKER:
Özalp Özer

TITLE
Mechanism Design (for a Capacity Investment Decision) under Dynamic Evolutions of Asymmetric (Demand) Information

ABSTRACT
This presentation will focus on issues arising in demand forecast information sharing and capacity investment in a supply chain. More generally, we will consider the role of time in information sharing and a strategic investment decision. To do so, we will provide a framework to model evolutions of asymmetric forecasts generated by multiple decision makers who forecast demand for the same product. This model will help us formulate and study mechanism design problems in a dynamic environment. We will provide a new method to solve such problems. To illustrate our approach, we will consider a supplier's (principal's) problem of eliciting credible forecast information from a manufacturer (agent) when both firms obtain asymmetric demand information for the end product over multiple periods. The supplier uses demand information to better plan for a capacity investment decision. When the supplier postpones building capacity, the supplier and the manufacturer can obtain more information and update their forecasts. This delay, however, may increase (or decrease) the degree of information asymmetry between the two firms, resulting in a higher (or lower) cost of screening. The capacity building cost may also increase due to the subsequent tighter deadline. Considering all such tradeoffs, the supplier has to determine (i) when to stop obtaining new demand information and invest in capacity, (ii) whether to offer a screening contract to credibly elicit private forecast information or to determine the capacity investment level without information sharing, (iii) how much capacity to build, and (iv) how to design the overall mechanism so that both firms benefit from this mechanism. This presentation will answer these questions and provide a framework to quantify the option value of time for a strategic investment decision under the dynamic evolutions of asymmetric forecasts.