Attitudes Toward Risk and Cost Pass-Through Differentiation Under Uncertainty

28 Pages Posted: 27 Jul 2023

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

Abstract

This paper takes into account the difference in risk aversion of producers to explain the degree of cost pass-through. Each producer can be either risk-neutral or risk-averse, characterized by a CARA utility function. We use our model to explain the surcharge formula in the stainless steel industry, in which American and European producers adopt 100% pass-through but Asian producers commit to zero pass-through. We find that the maximal pass-through differentiation structure arises if one supplier is risk-neutral (e.g., a Chinese state-owned enterprise) but the other is risk-averse (e.g., a domestic private enterprise). Contrarily, if both suppliers are similarly risk-averse (e.g., American vs.European producers), then the pass-through rates stay in the range of 40%-60% at market equilibrium. The presence of a risk-neutral foreign producer is an essential driver for a domestic risk-averse producer to push his pass-through rate toward an extremely high level. We also find that tariff is inefficient to promote the competitiveness of domestic producers.

Keywords: Channel management, mean-variance analysis, risk aversion, pass-through, stainless steel

Suggested Citation

Luong, Phat V. and Xu, Xiaowei, Attitudes Toward Risk and Cost Pass-Through Differentiation Under Uncertainty. Available at SSRN: https://ssrn.com/abstract=4522716 or http://dx.doi.org/10.2139/ssrn.4522716

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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