Costly Enforcement of Quality Standards in Decentralized Supply Chains

23 Pages Posted: 3 Nov 2008

See all articles by Anshul Sheopuri

Anshul Sheopuri

affiliation not provided to SSRN

Eitan Zemel

affiliation not provided to SSRN

Date Written: February 2008

Abstract

We consider a supply chain where the quality level can be observed by the buyer(s) onlyafter the purchase is completed (experience good). If the delivered quality is below the levels agreed in the contract, the buyer(s) may take action to seek remedy, but this effort is costly. Obviously, this fact can be exploited by the seller. In the case of a single buyer, we show that the buyer may not be motivated to appropriate all the channel profits but, rather, is able to pay a higher purchase price in order to induce the seller to provide higher quality. The set of purchase prices that support trade split into different regions. We identify regionswhere counterintuitive behavior is exhibited, for example, the buyer prefers higher purchase price, while the seller prefers lower purchase price.For the case of more than one buyer, we examine and contrast the behavior of two remedy regimes: In the case of individual enforcement, each buyer must work individually to enforce her own quality. In the case of joint enforcement, all buyers benefit from enforcement by a single buyer. We examine the externalities that arise in this supply chain and identify how the market share, enforcement costs and purchase price affect the quality level.

Suggested Citation

Sheopuri, Anshul and Zemel, Eitan, Costly Enforcement of Quality Standards in Decentralized Supply Chains (February 2008). Operations Management Working Papers Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1293125

Anshul Sheopuri (Contact Author)

affiliation not provided to SSRN

No Address Available

Eitan Zemel

affiliation not provided to SSRN

No Address Available

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