Download Electronic Markets and Supply Chain Coordination

Electronic Markets and Supply
Chain Coordination
Xiaotong Li
September, 2002
This project was supported by a research grant from CMER
University of Alabama in Huntsville
This work benefits from my conversation with John Conlon
and Vincent Wang
Background
• As one of the leading multidisciplinary business
research topics, supply chain coordination
literature is growing exponentially.
• Internet technologies and electronic markets
generates many opportunities in supply chain
management by providing extensive connectivity.
• With highly efficient and economic
communication channels, collaboration among
supply chain partners is greatly facilitated through
chain-wide coordination, information sharing and
incentive-aligned contracting.
Literature
• The standard supply chain coordination model is
the so-called “Newsvendor Model” in which a
single supplier and a single retailer try to
coordinate through order and production quantity.
• There are many interesting contracting
mechanisms including wholesale price contract
(Bresnahan and Reiss (1985), buy-back contract
(Anupindi and Bassok 1999), revenue sharing
contract (Cachon and Lariviere 2000), quantityflexibility contract (Tsay and Lovejoy 1999) and
sale rebate contract (Taylor 2000).
Literature
• The first extension allows the retailer to change retail
price (Petruzzi and Dada 1999). The second extension
gives the retailer the option to make some non-pricing
efforts to spur demand (Netessine and Rudi 2001). The
third extension allows multiple retailers (Wang and
Gerchak 2001). Other extensions include two inventory
replenishment model, multiple echelon model, internal
market transfer and demand forecast sharing under
information asymmetry.
• Among these extensions, demand forecast sharing under
information asymmetry (Cachon and Lariviere 2001)
looks particularly interesting. It recognizes the wide
spread information asymmetry existed in most supply
chains.
Basic Framework of Supply
Chain Coordination
• Each partner in a decentralized supply
chain is in general myopic, supply chain
coordination problems are often
examined in the game-theoretic
framework.
• A supply chain is said to be coordinated
if all channel participants’ independently
made myopic strategies can achieve
chain-wide global optimum.
Why Coordination
• Numerous studies have shown that
decentralized supply chains could become
inefficient and even in some cases chaotic
without proper coordination.
• For example, the well known “Bullwhip effect”
illustrates how small disturbance of
downstream orders can distort upstream
partners’ perception of market dynamics (Lee,
Padmanabhan and Whang 1997).
Why Coordination
• Some supply chain participants may seek
informational rent and credible information
sharing becomes a challenge. Some recent
studies along this line include information
sharing (Lee and Whang 1998), IT-enabled
new contracting mechanisms (Jin and Wu
2001) and the Internet facilitated new
distribution channels (Netessine and Rudi
2001), and e-business supply chain
integration (Lee and Whang 2001).
The 1st Model
( Preliminary with unclear Tractability)
• The first model examines a newsvender
model in a continuous time environment.
• Both coordinating parties’ expectations are
modeled by a martingale process.
• A generalized option embedded contract (like
the contract used in Cachon and Lariviere
2001) is used to coordinate the chain. So I
am able to model the scenario as real options
(Li and Johnson 2002, Dixit and Pindyck
1994).
The 1st Model
• Under risk neutrality, the option value can be
endogeously determined and the option
excise timing is also relevant here (compared
to the two period model where options can
only be excised at the beginning of the 2nd
period).
• Thanks to real time data sharing via highspeed network, the two parties can design a
contingent contract on a real time basis.
The 1st Model
• Our model will focus on the continuous time
contingent contracts that coordinate the
chain.
• Information asymmetry may significantly
complicate the coordination problem. It
requires coordination on two dimensions:
options pricing and excise timing. Bayesian
game is considered with incomplete
information.
• In a more general setting, we also need to
consider the feedback of elastic demand on
option values like Burnetas and Ritchken
(2002).
The
nd
2
Model
(also preliminary)
• The second model is motivated by my recent
studies of “informational externalities” and
“network externalities”.
• Similar to Katz and Shapiro (1986), we
consider a two period model with uninternalized externalities.
• In order to take advantage of network effects
in the second period, a supply chain player
may alter its pricing strategy to preemptively
gain market share in the first period.
The
nd
2
Model
• But his chain partner may not have the
incentive to help him without appropriate
long-term contract (or just because of the
information asymmetry).
• I thus focus on subgame perfect equilibrium.
• The problem becomes even more complex
when a competing supply chain is also
considered in the model. Competing chains
are commonly seen in system market
(Church and Gandal 2000, Farrell, Monroe
and Saloner 1998).
The
nd
2
Model
• If two chains are competing (we consider a
duopoly) in a market subject to network
externalities, both chain’s pricing strategies
can affect chain coordination dynamics.
• In the case that multiple equilibria exist,
equilibrium selection may depend on the
assumptions of consumers’ expectation
dynamics (e.g. rational expectations v.s.
naïve expectations).
The
nd
2
Model
• With incomplete information and information
asymmetry, the model will also address
issues like signaling (also discussed in
Cachon and Lariviere 2001), cheap talk
(Crawford and Sobel 1982, Farrell 1994,
Battaglini 2002) and strategic learning
(Ellison and Fudenberg 1995).
• If consumers form herd because of
informational externality, the supply chain
partners face a similar coordination problem
as the network externality scenario:
preemptive pricing strategy may be used.
Some Potential Issues
• An intriguing question merits exploration is
whether electronic markets and the Internet in
general can facilitate supply chain
coordination and internalization of
externalities.
• Cheap talk v.s. formal coordination
• Costs of Supply Chain Contracting.
Implications from Grossman-Hart-Moore
Incomplete contracts.