Behavioral Simulation of Blockchain-Enabled Market for Supplier Capacity Trading among Retailers

Georgetown McDonough School of Business Research Paper No. 4378679

Posted: 9 Mar 2023 Last revised: 2 Dec 2023

See all articles by Kai Wendt

Kai Wendt

WHU - Otto Beisheim School of Management

Volodymyr Babich

Georgetown University - McDonough School of Business

Daniel Hellwig

WHU - Otto Beisheim School of Management

Arnd Huchzermeier

WHU - Otto Beisheim School of Management

Date Written: December 1, 2023

Abstract

We study a supply chain distribution system (comprising a supplier and multiple retailers) and investigate experimentally how the trading by retailers of digital claims (tokens) on the supplier's capacity affects supply-demand mismatches. Creating markets for such tokens relies on advances in blockchain technology. Subjects play the role of retailers, who have heterogeneous valuations of goods, face random demands, and buy tokens on the supplier's capacity. Following demand realization, retailers trade these tokens with each other. We conduct six behavioral experiments (featuring two wholesale prices and three market sizes) and find that markets reduce excess inventory and shortages. Market-clearing prices are anchored to wholesale prices and do not signal the value of goods in large markets. Players deploy novel ordering and trading strategies that differ from transshipper strategies, as studied in the literature. Applying unsupervised machine learning algorithms, we classify these strategies. In one strategy, players, whom we call spot buyers, buy a few claims initially, and after demand realization, use the market to satisfy it. Other players, whom we call spot sellers, buy more claims initially than the maximum demand, and once demand is known, sell their excess on the market. Both strategies reduce costs from demand uncertainty. Despite this benefit, the transshipper strategy is more profitable, due to lower exposure to liquidity shocks and trading mistakes. With markets, the initial orders to the supplier exhibit the pull-to-the-mean effect, and at the same time, have greater variability because of spot buyers and sellers. Retailers' average profit is higher with markets, but suppliers with low wholesale prices suffer from lower revenues because of the pull-to-the-mean effect. Our results provide guidance for the introduction of blockchain-enabled markets in practice.

Keywords: virtual markets, tokenization, behavioral operations, blockchain technology, supply chain management

Suggested Citation

Wendt, Kai and Babich, Volodymyr and Hellwig, Daniel and Huchzermeier, Arnd, Behavioral Simulation of Blockchain-Enabled Market for Supplier Capacity Trading among Retailers (December 1, 2023). Georgetown McDonough School of Business Research Paper No. 4378679, Available at SSRN: https://ssrn.com/abstract=4378679 or http://dx.doi.org/10.2139/ssrn.4378679

Kai Wendt

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Volodymyr Babich (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Daniel Hellwig

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Arnd Huchzermeier

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509380 (Phone)
+49-261-6509389 (Fax)

HOME PAGE: http://www.whu.edu/prod

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