Supply chain coordination and setup cost reduction in case of asymmetric information

Previous research shows that asymmetric information triggers a decrease of lot sizes compared to the supply chain optimum. Thus, the setup costs per period are suboptimally high. To analyse, whether setup cost reduction can mitigate this effect, we extend the standard framework of lotsizing decisions under asymmetric information by allowing investments in setup cost reduction. We find that asymmetric information tends to lead to an overinvestment in setup cost reduction. The overall effect of setup cost reduction on supply chain performance is therefore ambiguous. We show that these results hold for a wide variety of investment functions.