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					 Coordinating Contracts for Decentralized Supply Chains with Retailer
                          Promotional Effort



In this paper, a risk-neutral manufacturer sells a single product to a
risk-neutral retailer. The retailer chooses inventories ex ante and
promotional effort ex post. If the wholesale price exceeds marginal
production cost, the retailer orders fewer than the joint
profit-maximizing inventories. If the manufacturer attempts to
coordinate inventories by buying back unsold units, then the retailer's
promotional incentives are dulled. Under very general assumptions on
the form of the effort function, we show that buy-backs adversely
affect supply chain profits, and higher buy-back prices imply lower
profits. Also, while a buy-back alone can not coordinate the channel,
coupling buy-backs with promotional cost-sharing agreements (if effort
cost is observable), or offering unilateral markdown allowances ex post
(if demand is observable but not verifiable), or placing additional
constraints on the buy-back (if demand is observable and verifiable)
does result in coordination. This problem is not just limited to
returns policies but is shown to hold for a much larger set of
contracts. The results are quite robust (e.g., when the retailer
chooses effort before observing demand), but coordinating contracts
become more problematic if, for example, the retailer also stocks
substitutes for the manufacturer's product. Other model extensions
are also discussed.
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posted:5/23/2011
language:English
pages:1