Supply Chain Frictions

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

No 19013, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: D82 D86 L42 L60 (search for similar items in EconPapers)
Date: 2024-04
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Working Paper: Supply Chain Frictions (2024)
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