Template-Type: ReDIF-Paper 1.0
Title: Supply Chain Frictions
Author-Name: Ying-Ju Chen
Author-Email: imchen@ust.hk
Author-Name: Zhengqing Gui
Author-Email: zgui@nus.edu.sg
Author-Name: Ernst-Ludwig von Thadden
Author-Email: vthadden@uni-mannheim.de
Author-Name: Xiaojian Zhao
Author-Email: xjzhao81@gmail.com
Classification-JEL: D82, D86, L42, L60

Keywords: Supply chains, informational frictions, buyback contracts, incentive compatibility, limited liability, ironing


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.

Note: 
Length: 50
Creation-Date: 2024-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp528
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_528