Supply Chain Frictions

Ying-Ju Chen (), Zhengqing Gui (), Ernst-Ludwig von Thadden and Xiaojian Zhao

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

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.

Keywords: Supply chains; informational frictions; buyback contracts; incentive compatibility; limited liability; ironing (search for similar items in EconPapers)
JEL-codes: D82 D86 L42 L60 (search for similar items in EconPapers)
Pages: 50
Date: 2024-04
New Economics Papers: this item is included in nep-com, nep-ind and nep-mic
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Working Paper: Supply Chain Frictions (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2024_528

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