Supply Chain Performance under Market Valuation: An Operational Approach to Restore Efficiency

44 Pages Posted: 8 Jul 2011 Last revised: 15 Oct 2011

See all articles by Guoming Lai

Guoming Lai

University of Texas at Austin - Red McCombs School of Business

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences

Jun Yang

Huazhong University of Science and Technology (Formerly Tongi Medical University) - School of Management

Date Written: September 22, 2011

Abstract

Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general single contract offer. We show that the buyer’s stocking decision can be distorted from the first-best level in equilibrium. Such a downstream stocking distortion is always detrimental for the buyer but might benefit (or hurt) the supplier and the supply chain for some contract terms. We further reveal scenarios where full supply chain efficiency cannot be reached under any single contract offer. Then, focusing on contract design, we show a general condition under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain in equilibrium. Our study demonstrates that in a supply chain context, a firm’s incentive to take real economic activities to influence capital market valuation can potentially be resolved through operational means.

Keywords: Supply Chain, Newsvendor, Capital Market Valuation

Suggested Citation

Lai, Guoming and Xiao, Wenqiang and Yang, Jun, Supply Chain Performance under Market Valuation: An Operational Approach to Restore Efficiency (September 22, 2011). Available at SSRN: https://ssrn.com/abstract=1881697 or http://dx.doi.org/10.2139/ssrn.1881697

Guoming Lai (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Wenqiang Xiao

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

Jun Yang

Huazhong University of Science and Technology (Formerly Tongi Medical University) - School of Management ( email )

1037 Luoyu Road
Wuhan, Hubei 430074
China

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