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Supply Chain Frictions

Author

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

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

  • Chen, Ying-Ju & Gui, Zhengqing & von Thadden, Ernst-Ludwig & Zhao, Xiaojian, 2024. "Supply Chain Frictions," CEPR Discussion Papers 19013, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19013
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    More about this item

    Keywords

    Supply chains;

    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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