Vertical contracts and the bullwhip effect: Model, extensions and possible applications to trade

Date: 2020-10-30 16:22:48
Time: 14:00-15:30
Venue: Tecent Meeting
Speaker: School of Economics
Category: Talk & Lecture

Moderator:  Dr. Ye Bing, associate professor, School of Economics, Zhejiang University 

Tecent Meeting ID:309 430 555)

Speakers: Dr. Zhan Qu, assistant professor, Faculty of Business and Economics, University of Göttingen

Abstract: This paper shows that allowing downstream firms in a supply chain to carry strategic inventory may dampen the bullwhip effect, thereby making the supply chain more resilient to demand shocks. Strategic inventory occurs if downstream firms move orders forward in order to put pressure on the wholesale prices that suppliers charge on subsequent purchases. We show that it is the process of forward buying that reduces the variance of suppliers' production relative to buyers' sales. Since strategic inventory involves an implicit cost there is a limit to how much strategic inventory buyers should be allowed to carry and hence how much the bullwhip effect should be dampened. We prove that suppliers should only eliminate the bullwhip effect if demand shocks are not too persistent.