Sustaining long-term supply chain partnerships using price-only contracts

In this paper, we study how an informal, long-term relationship between a manufacturer and a retailer performs in turbulent market environments characterized by uncertain demand. We show that the long-term partnership based on repeated interaction is sustainable under price-only contracts when the supply chain partners are sufficiently patient. That is, the channel can be coordinated over a long time horizon when the factor whereby the members discount the future value of this trusting relationship is sufficiently high. Second, above the minimum discount factor, a range of wholesale prices exists that can sustain the long-term partnership, and there are different possible profit divisions between the two players. Third, when the market is turbulent, i.e., either the expected demand or the demand variance changes from period to period according to a probabilistic law, it is typically less possible to sustain the long-term partnership in a booming market or in a market with low demand variability. Finally, obtaining more information about future market fluctuation may not help the supply chain to sustain the long-term partnership, due to partners’ strategic considerations. With the availability of the market signal, total supply chain profits increase, but the retailer may even be worse-off.