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Supply chain coordination by risk sharing contracts under random production yield and deterministic demand


  • Karl Inderfurth

    () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

  • Josephine Clemens

    () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)


From a large body of research studies we know that properly designed contracts can facilitate coordinated decision making of multiple actors in a supply chain (SC) so that efficiency losses for the SC as a whole can be avoided. In a newsvendor-type SC with stochastic demand it is well-known that due to the double marginalization effect a simple wholesale price contract will not achieve coordination. More complex contracts, however, do so, especially those which enable an appropriate sharing of risks between the SC actors. While the effectiveness of risk sharing contracts is well understood for SC situations with random demand and reliable supply, we do not know much about respective SC coordination problems if demand is deterministic, but supply is unreliable due to random production yield. For a buyer-supplier SC representing the latter SC setting, it is analyzed how the distribution of risks affects the coordination of buyer's ordering and supplier's production decision. In a basic random yield, deterministic demand setting both parties are exposed to risks of over-production or underdelivery, respectively, if a simple wholesale price contract is applied. The resulting risk distribution will always be such that SC coordination cannot be achieved. It can be shown, however, that two more sophisticated contract types with penalty and reward elements for the supplier can change the risk distribution in such a way that SC coordination is possible under random yield. Additionally, it is proved that also the wholesale price contract will guarantee SC coordination if the supplier has a second (emergency) procurement source at her disposal that is more costly, but reliable. Moreover, restricting oneself to wholesale price contracts it is shown that it can be beneficial to both parties to utilize this emergency source even if it is not profitable from a SC perspective.

Suggested Citation

  • Karl Inderfurth & Josephine Clemens, 2011. "Supply chain coordination by risk sharing contracts under random production yield and deterministic demand," FEMM Working Papers 110025, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  • Handle: RePEc:mag:wpaper:110025

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    References listed on IDEAS

    1. Yann Bramoullé & Dunia López-Pintado & Sanjeev Goyal & Fernando Vega-Redondo, 2004. "Network formation and anti-coordination games," International Journal of Game Theory, Springer;Game Theory Society, vol. 33(1), pages 1-19, January.
    2. Neyman, Abraham, 1985. "Bounded complexity justifies cooperation in the finitely repeated prisoners' dilemma," Economics Letters, Elsevier, vol. 19(3), pages 227-229.
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    4. Berninghaus, Siegfried K. & Ehrhart, Karl-Martin & Ott, Marion, 2012. "Forward-looking behavior in Hawk–Dove games in endogenous networks: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 75(1), pages 35-52.
    5. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    6. Pingle, Mark, 1992. "Costly optimization: an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 3-30, January.
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    Supply chain coordination; contracts; random yield; risk sharing; emergency procurement;

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