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Pass-through of commodity price shocks in distribution channels with risk-averse agents

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  • Luong, Phat V.
  • Xu, Xiaowei

Abstract

We apply variance analysis for studying the risk sharing mechanism in distribution channels, in which the risk-averse buyer and supplier are suffered from commodity price shocks. We obtain the closed-form optimal pass-through rate that minimizes the total channel price/cost risk and maximizes the channel throughput for a Stackelberg leadership game and a Nash bargaining solution. Using the commodity price data in the steel industry, we demonstrate that the pass-through rate should be set between 40 and 80% for major metal alloys.

Suggested Citation

  • Luong, Phat V. & Xu, Xiaowei, 2020. "Pass-through of commodity price shocks in distribution channels with risk-averse agents," International Journal of Production Economics, Elsevier, vol. 226(C).
    • Handle: RePEc:eee:proeco:v:226:y:2020:i:c:s0925527319304402
    DOI: 10.1016/j.ijpe.2019.107609
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