Drop-shipping or batch ordering : contract choice in the presence of information sharing and quality decision

This study investigates the manufacturer's contract choice (drop-shipping or batch ordering) and retailer's information sharing strategy in the presence of product quality decisions. The equilibrium outcomes give strategic choices for both the manufacturer and retailer. Specifically, the retailer prefers to share demand information when the quality investment efficiency is high under batch ordering contract, while he always chooses to share information under drop-shipping contract. Given no information sharing, the manufacturer chooses the batch ordering contract if the revenue-sharing rate is high. Given information sharing, the manufacturer prefers batch ordering contract when either of the following conditions holds: a) when the revenue-sharing rate is low and quality investment efficiency is low; b) when the revenue-sharing rate is high and quality investment efficiency is high; otherwise, the manufacturer prefers drop-shipping contract. Additionally, our results indicate that there may exist a “prisoner's dilemma” when the drop-shipping contract is a dominant strategy for the manufacturer and sharing demand information is a dominant strategy for the retailer.