Buyback Contracts with a Stochastic Demand Curve
Chinese Academy of Sciences (CAS)
The Hong Kong Polytechnic University - Institute of Textiles and Clothing
Hong Kong Polytechnic University
University of Texas at Dallas - Naveen Jindal School of Management
Chinese Academy of Sciences (CAS) - Center for Forecasting Science; Academy of Mathematics and Systems Sciences
February 25, 2010
We explore buyback contracts in a supplier-retailer supply chain where the retailer faces a price-dependent downward-sloping demand curve subject to uncertainty. We formulate the problem as a supplier-led Stackelberg game and derive explicitly the equilibrium contract parameters along with the corresponding retail price and order quantity - all as functions of the demand curve uncertainty level. We examine the value of buyback and assess its impact on the supply chain's efficiency. We find that in equilibrium (i) Pareto-improvement can be attained using buyback only at an intermediate uncertainty level, (ii) the supply chain's efficiency is maintained at 75% of the optimal channel profit regardless of the uncertainty level, (iii) the retailer orders more only at an intermediate uncertainty level, (iv) the supplier need not change the equilibrium wholesale price associated with the corresponding deterministic demand curve and only needs to adjust the buyback price in response to the uncertainty level, and (v) the end consumers do not benefit from buyback regardless of the uncertainty level. We derive insights and managerial implications of the theoretical results.
Number of Pages in PDF File: 35
Keywords: buyback contract, supply chain coordination
JEL Classification: M11working papers series
Date posted: March 3, 2010
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.359 seconds