Analytical Model of Adoption of Item Level RFID in a Two-Echelon Supply Chain with Shelf-Space and Price-Dependent Demand

Abstract

We investigate whether it is possible for the manufacturer as well as the retailer to derive economic benefits from item-level RFID. We consider a particular model of shelf-space and price-dependent retail demand and two configurations of the supply chain. In both instances the interaction between the supplier and the retailer is via a wholesale price contract. In one case it is the supplier who sets a linear wholesale tariff on the finished goods. In another case both retail and wholesale prices are set exogenously, and the supplier must pay the retailer for shelf-space so that the retailer will carry the supplier's product. We find that in both cases when the supplier benefits from item-level RFID so does the retailer. However when the supplier sets the wholesale price the interests of the supplier and the retailer are aligned if the retailer benefits from item-level RFID then so does the supplier and vice versa. On the other hand if wholesale prices are set exogenously, and the supplier is able to command payment for shelf-space it is possible for the interests not to be aligned: the retailer may be benefiting from RFID technology as the supplier is losing money.