Abstract
Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general single contract offer. We show that the buyer’s stocking decision can be distorted from the first-best level in equilibrium. Such a downstream stocking distortion is always detrimental for the buyer but might benefit (or hurt) the supplier and the supply chain for some contract terms. We further reveal scenarios where full supply chain efficiency cannot be reached under any single contract offer. Then, focusing on contract design, we show a general condition under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain in equilibrium. Our study demonstrates that in a supply chain context, a firm’s incentive to take real economic activities to influence capital market valuation can potentially be resolved through operational means.
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