Download Strategic Customer Behavior, Commitment, and Supply Chain

Department of Information and Systems Management
School of Business and Management
Hong Kong University of Science and Technology
Seminar Announcement
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by
Professor Fuqiang Zhang
The Paul Merage School of Business
University of California, Irvine
20 Oct 2006 (Friday)
11:00 am – 12:00 noon
Room 3416 (L17/18)
 All interested are welcome 
Abstract
This paper studies the impact of strategic customer behavior on supply chain performance. We start
with a newsvendor seller facing forward-looking customers. The seller initially charges a regular price
but may salvage the leftover inventory at a lower salvage price after random demand is realized.
Customers anticipate future sales and choose purchase timing to maximize their expected surplus. We
characterize the rational expectations (RE) equilibrium, where we find that the seller's stocking level
is lower than that in the classic model without strategic customers. We show that the seller's profit can
be improved by promising that: either quantities available will be limited (quantity commitment) or
prices will be kept high (price commitment). In most cases, both forms of commitment are not
credible in a centralized supply chain with a single seller. However, decentralized supply chains can
use contractual arrangements as indirect commitment devices to attain the desired outcomes with
commitment. While decentralization has generally been associated with coordination problems, we
present the contrasting view that disparate interests within a supply chain can actually improve overall
supply chain performance. In particular, with strategic customer behavior, we find that: (i) a
decentralized supply chain with a wholesale price contract may perform strictly better than a
centralized supply chain; (ii) contracts widely studied in the supply chain coordination literature (e.g.,
markdown money, sales rebates, and buyback contracts) can serve as a commitment device as well as
an incentive-coordinating device; and (iii) strategic customer behavior sometimes imposes constraints
on how profits must be allocated between the supply chain members under the above contracts.
Biography
Professor Zhang received his Ph.D. from the Wharton School, University of Pennsylvania. He joined
the Paul Merage School of Business at University of California, Irvine in July, 2004. Professor
Zhang's main research interests are in supply chain management and incentives in operations
management. In particular, he is interested in the application of economics theories to Operations
Management, including game theory, the theory of auctions and the theory of incentives. His work
has been published in Management Science and Manufacturing & Service Operations Management.
His recent research covers supply chain contracting and customer behavior in operations management.