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Supply Chain Dynamics: How Risk and Bargaining Shape Cost Pass-through

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  • Junhyun Bae

Abstract

This study employs a game-theoretic approach to examine cost pass-through in a supply chain involving a manufacturer and a retailer, factoring in yield uncertainty and bargaining power. We analyze how manufacturer cost changes affect wholesale and retail prices, focusing on supply-side risks and negotiation dynamics. The base model reveals three key insights: (1) yield uncertainty lowers the cost pass-through rate, stabilizing downstream prices; (2) higher mean yield enhances pass-through, reflecting cost shifts more fully; and (3) increased manufacturer bargaining power reduces pass-through, keeping costs upstream. An extended model introduces retailer effort to boost demand, uncovering additional dynamics: low effort costs can lead to negative pass-through, where retail prices drop despite cost rises, while higher effort costs shift pass-through toward positive values. These findings underscore the complex interplay of uncertainty, bargaining, and strategic effort in shaping pricing outcomes. We offer managerial insights for navigating cost volatility and suggest future research directions, such as dynamic models and empirical validation.

Suggested Citation

  • Junhyun Bae, 2025. "Supply Chain Dynamics: How Risk and Bargaining Shape Cost Pass-through," Bulletin of Applied Economics, Risk Market Journals, vol. 12(1), pages 107-117.
    • Handle: RePEc:rmk:rmkbae:v:12:y:2025:i:1:p:107-117
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    References listed on IDEAS

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    1. Quan Zheng & Honggang Hu & Xiajun Amy Pan, 2023. "Implications of product substitutability in a distribution channel," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 1636-1653, June.
    2. Jens‐Peter Loy & Christoph Weiss, 2019. "Product Differentiation and Cost Pass‐Through," Journal of Agricultural Economics, Wiley Blackwell, vol. 70(3), pages 840-858, September.
    3. Qi Feng & Yuanchen Li & J. George Shanthikumar, 2022. "Negotiations in Competing Supply Chains: The Kalai-Smorodinsky Bargaining Solution," Management Science, INFORMS, vol. 68(8), pages 5868-5890, August.
    4. Richards, Timothy J. & Allender, William J. & Hamilton, Stephen F., 2012. "Commodity price inflation, retail pass-through and market power," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 50-57.
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    Keywords

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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