Coordinating a Supply Chain When Facing Strategic Consumers

Abstract

ABSTRACTThis article examines the impact of strategic consumers on the efficiency and coordination of a supply chain. We consider a supply chain consisting of a manufacturer and a newsvendor retailer selling a seasonal product to strategic consumers, who may choose to wait for clearance sales to maximize their intertemporal utility. Under a prenegotiated supply contract, the retailer chooses retail price and ordering quantity simultaneously. After that, the strategic consumers, who may be heterogeneous in their patience levels, make purchasing decisions. We find that strategic consumer behavior can hurt the supply chain efficiency due to severe double marginalization, and that a simple buyback contract can coordinate the supply chain. Nevertheless, we show that the supply chain does become more difficult to coordinate when strategic consumers are present: the set of buyback contractual terms that coordinate the chain shrinks as consumers are more willing to wait, and the chain profit cannot be arbitrarily allocated between the firms. Contrary to popular intuition, this result implies that the retailer may enjoy some benefit from consumers' strategic waiting. In addition, we find that the retailer's gain is the highest when impatient and patient consumers are comparably mixed in the population.