Are Strategic Customers Bad for a Supply Chain?

31 Pages Posted: 13 Nov 2017 Last revised: 6 Jun 2018

See all articles by Yenting Lin

Yenting Lin

University of San Diego

Ali K. Parlakturk

University of North Carolina (UNC) at Chapel Hill - Operations Area

Jayashankar M. Swaminathan

University of North Carolina (UNC) at Chapel Hill - Operations Area

Date Written: May 13, 2017

Abstract

We consider a manufacturer serving a retailer who sells its product to customers over two periods. Each firm determines its unit price. The retailer orders the product from the manufacturer prior to the beginning of the selling periods. We consider two types of customers: strategic customers who take their future options into account and time their purchases accordingly, and myopic customers who consider only their current options. We compare the resulting equilibria for these two scenarios and evaluate the impact of customers' strategic behavior. We find that strategic customer behavior always benefits the manufacturer. Interestingly, it may also improve profitability of the retailer and the entire supply chain in some cases. Strategic customer behavior and decentralization are often regarded as detriments to supply chain performance. We find that, however, the combination of these two factors may not result in the worst supply chain performance. When customers are sufficiently patient, a decentralized supply chain that faces strategic customers actually outperforms the supply chain with only one of those factors at play. Finally, we show that when customers are strategic, the retailer's and manufacturer's profits with price commitment, availability commitment or quick response can be lower than those when customers are myopic.

Keywords: strategic customers; supply chain management

JEL Classification: M

Suggested Citation

Lin, Yenting and Parlakturk, Ali K. and Swaminathan, Jayashankar M., Are Strategic Customers Bad for a Supply Chain? (May 13, 2017). Kenan Institute of Private Enterprise Research Paper No. 18-9, Available at SSRN: https://ssrn.com/abstract=3068278 or http://dx.doi.org/10.2139/ssrn.3068278

Yenting Lin (Contact Author)

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Ali K. Parlakturk

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States
(919) 962-3181 (Phone)

Jayashankar M. Swaminathan

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States

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