Supply Chain Performance Under Market Valuation: An Operational Approach to Restore Efficiency

Guoming Lai (), Wenqiang Xiao () and Jun Yang ()
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Guoming Lai: McCombs School of Business, University of Texas at Austin, Austin, Texas 78712
Wenqiang Xiao: Stern School of Business, New York University, New York, New York 10012
Jun Yang: School of Management, Huazhong University of Science and Technology, Wuhan, 430074 Hubei, China

Management Science, 2012, vol. 58, issue 10, 1933-1951

Abstract: Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general, single buyback contract. We show that the buyer's stocking decision can be distorted in equilibrium. Such a downstream stocking distortion hurts the buyer firm's own performance, and it also influences the performances of the supplier and the supply chain. We further reveal scenarios where full supply chain efficiency cannot be reached under any single buyback contract. Then, focusing on contract design, we characterize conditions under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain. Our study demonstrates that in a supply chain context, a firm's incentive to undertake real economic activities to influence capital market valuation can potentially be resolved through operational means. This paper was accepted by Yossi Aviv, operations management.

Keywords: supply chain; newsvendor; capital market valuation (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (21)

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