Agency Costs in a Supply Chain with Demand Uncertainty and Price Competition

V. G. Narayanan (), Ananth Raman () and Jasjit Singh ()
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V. G. Narayanan: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Ananth Raman: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Jasjit Singh: INSEAD, 1 Ayer Rajah Avenue, 138676 Singapore

Management Science, 2005, vol. 51, issue 1, 120-132

Abstract: In this paper, we model a manufacturer that contracts with two retailers, who then choose retail prices and stocking quantities endogenously in a Bayesian Nash equilibrium. If the manufacturer designs a contract that is accepted by both retailers, it sets the wholesale price as a compromise between two conflicting roles: reducing intrabrand retail price competition and inducing retailers to stock closer to first-best levels (that is, optimum for the supply chain as a whole). In equilibrium, fill rates are less than first best. If, on the other hand, the manufacturer eliminates retail competition by designing a contract accepted by only one retailer, the assignment of consumers to retailers is inefficient. In either equilibrium, the performance of the supply chain is strictly less than first best. However, the manufacturer achieves first-best retail prices and fill rates if it can subsidize the retailers' leftover inventory. Absent such subsidies, the two-retailer equilibrium arises when the two retailers compete less intensively. In that equilibrium, numerical results indicate that the value of subsidizing unsold inventory is increasing in demand uncertainty, intensity of retail competition, and salvage value of inventory, and is decreasing in manufacturing cost and opportunity cost of shelf space.

Keywords: supply chain management; contracts; incentives; safety stock; buyback; inventory subsidies; Hotelling models; Linear City (search for similar items in EconPapers)
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:51:y:2005:i:1:p:120-132

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