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Supply Chain Frictions

Author

Listed:
  • Ying-Ju Chen
  • Zhengqing Gui
  • Ernst-Ludwig von Thadden
  • Xiaojian Zhao

Abstract

A central problem in supply chains is to coordinate the mismatch between supply and demand along the chain. This paper studies a problem of contracting between a manufacturer and a retailer who privately observes the retail demand materialized after the contracting stage. Under quite general assumptions, we show that the optimal contract must be either a wholesale contract or a buyback contract, depending on the retailer's ex-ante liquidity and bargaining power. In a buyback contract, the manufacturer requests an upfront payment from the retailer and buys back the unsold inventory at a previously agreed price. Depending on downstream liquidity and bargaining power this price may be constant or demand-dependent. Since return shipments are inefficient, retail supply and price will be lower than the first-best level. The optimal contracts are robust to several extensions including multiple retailers.

Suggested Citation

  • Ying-Ju Chen & Zhengqing Gui & Ernst-Ludwig von Thadden & Xiaojian Zhao, 2024. "Supply Chain Frictions," CRC TR 224 Discussion Paper Series crctr224_2024_528, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_528
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp528
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    References listed on IDEAS

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    1. Martin F. Hellwig, 2010. "Incentive Problems With Unidimensional Hidden Characteristics: A Unified Approach," Econometrica, Econometric Society, vol. 78(4), pages 1201-1237, July.
    2. F J Arcelus & S Kumar & G Srinivasan, 2007. "Manufacturer's pricing strategies in a single-period framework under price-dependent stochastic demand with asymmetric risk-preference information," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(11), pages 1449-1458, November.
    3. James A. Mirrlees, 1974. "Optimum Accumulation Under Uncertainty: the Case of Stationary Returns to Investment," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 3, pages 36-50, Palgrave Macmillan.
    4. Raymond Deneckere & James Peck, 1995. "Competition Over Price and Service Rate When Demand is Stochastic: A Strategic Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 148-162, Spring.
    5. João Montez, 2015. "Controlling opportunism in vertical contracting when production precedes sales," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 650-670, September.
    6. Sharat Ganapati & Woan Foong Wong, 2023. "How Far Goods Travel: Global Transport and Supply Chains from 1965–2020," Journal of Economic Perspectives, American Economic Association, vol. 37(3), pages 3-30, Summer.
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    More about this item

    Keywords

    Supply chains; informational frictions; buyback contracts; incentive compatibility; limited liability; ironing;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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