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Mathematical Problems in Engineering
Volume 2014, Article ID 263419, 11 pages
http://dx.doi.org/10.1155/2014/263419
Research Article

The Quota-Based Compensation Plan in Fashion Retailing Industry under Asymmetric Information

1Department of Transportation Engineering, College of Civil Engineering, Shenzhen University, Shenzhen 518060, China
2Department of Management Science, School of Management, Xi’an Jiaotong University, Xi’an 710049, China
3Department of Management Science, College of Management, Shenzhen University, Shenzhen 518060, China

Received 20 March 2014; Revised 2 May 2014; Accepted 13 May 2014; Published 1 June 2014

Academic Editor: Pui-Sze Chow

Copyright © 2014 Mingzhu Yu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We study a compensation plan problem in the fashion retailing industry, which involves a risk-neutral fashion retailer and a risk-neutral salesperson, in a two-stage game framework with asymmetric information. In the first stage, the fashion retailer provides a menu of compensation plans to the salesperson who decides which plan to sign based on his superior market demand information. Confronted with the asymmetric demand information, the fashion retailer could observe market information from the salesperson's response by designing a menu of compensation plans rather than a single one to the salesperson. In the second stage, the fashion retailer then makes production decision and the salesperson determines his selling effort. We consider both adverse selection and moral hazard. We adopt the quota-based plan to derive the fashion retailer’s optimal compensation plan design and the salesperson's best response. We emphasize the impact of the quota level on the system outcomes. The results reveal that a higher quota level is disadvantageous to the fashion retailer but advantageous to the salespersons.