Pass-through of Commodity Price Shocks in Distribution Channels with Risk-averse Agents

International Journal of Production Economics

30 Pages Posted: 13 Jan 2020 Last revised: 26 Apr 2021

See all articles by Phat V. Luong

Phat V. Luong

SUNY Polytechnic Institute, College of Business Management

Xiaowei Xu

Rutgers, The State University of New Jersey - Supply Chain Management Department

Date Written: September 10, 2017

Abstract

We apply variance analysis for studying the risk-sharing mechanism in distribution channels, in which the risk-averse buyer and supplier are suffered from commodity price shocks. We obtain the closed-form optimal pass-through rate that minimizes the total channel risk and maximizes the channel throughput for a Stackelberg leadership game and a Nash bargaining solution. Using the commodity price data in the steel industry, we demonstrate that the pass-through rate should be set between 40 and 80% for major metal alloys.

Keywords: Variance analysis, CARA, pass-through, surcharge, risk aversion, stainless steel

JEL Classification: D22,L11

Suggested Citation

Luong, Phat V. and Xu, Xiaowei, Pass-through of Commodity Price Shocks in Distribution Channels with Risk-averse Agents (September 10, 2017). International Journal of Production Economics, Available at SSRN: https://ssrn.com/abstract=3479868 or http://dx.doi.org/10.2139/ssrn.3479868

Phat V. Luong (Contact Author)

SUNY Polytechnic Institute, College of Business Management ( email )

100 Seymour Rd
Donovan 1101
Utica, NY 13502
United States

Xiaowei Xu

Rutgers, The State University of New Jersey - Supply Chain Management Department ( email )

Piscataway, NJ
United States

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