The risk and information sharing of application services supply chain

We study an application services supply chain consisting of one application service provider (ASP) and one application infrastructure provider (AIP). The AIP supplies the computer capacity to the ASP that in turn sells the value-added application services to the market. The market is characterized by a price-sensitive random demand. The ASP's objective is to determine the optimal price of its service to the market and the optimal capacity to purchase from the AIP. The AIP's goal on the other hand is to maximize its profit from selling the capacity to the ASP. In this paper, we examine the supply chain's performance under different coordination strategies involving risk and information sharing between the ASP and the AIP. We find several key managerial insights from our model. Most importantly, we find an effective decentralized mechanism to achieve the goal of maximizing the overall supply chain performance. Absent this effective mechanism, we find that it is better to let the player closer to the market coordinate the supply chain. (C) 2006 Elsevier B.V. All rights reserved.