The Blockchain Newsvendor: Value of Freshness Transparency and Smart Contracts

Abstract

Motivated by blockchain applications in the fresh produce industry, we consider a newsvendor problem in which a retailer faces stochastic and freshness-dependent consumer demand. The retailer can adopt blockchain technology to have more transparent information on the freshness of supply. We quantify the value of blockchain-enabled fresh-ness transparency by analyzing the retailer’s expected profit growth and food waste reduction brought by adopting blockchain, relative to the case of a traditional retailer without blockchain. We extend our model and analysis to the case of smart contracts that enable automated trade as long as supply is sufficiently fresh, and examine the added value of such smart contracts to the retailer. Finally, we also generalize our findings to the cases of (i) dual sourcing, (ii) noisy measurements in Internet of Things (IoT) sensors feeding data into the blockchain system, and (iii) price differentiation based on freshness.

Keywords: Blockchain, supply chain transparency, freshness, newsvendor, smart contracts, dual sourcing, Internet of Things, price differentiation.