Blockchain and smart contracts in supply chain management: A game theoretic model

Abstract

This paper proposes a supply chain game that is composed of two firms, one supplier and one retailer. The supplier sells goods to the retailer and sets the service strategy efforts. The retailer determines the optimal quantity to purchase and the selling price. The supply chain can be managed through either a traditional online platform or a blockchain. In the former, firms face business risks due to delivery and service and also pay high transaction costs. In the latter, they work on a blockchain platform, remove all risks over the supply chain, and save the transaction costs. However, the blockchain requires initial implementation investments as well as variable costs. Furthermore, the firms gain in terms of visibility, transparency, and security, which are summarized in tokens. We identify the conditions and the stochastic cases in which the blockchain is not worth implementing. Then, we investigate the suitability of a smart wholesale price contract and a smart revenue sharing contract to better coordinate firms’ relationships and negotiations. We highlight all cases in which the use of smart contracts makes blockchain applications more operationally convenient and economically appealing.