Downstream Buyers Research Articles

Multistage Intermediation in Display Advertising

Problem definition : We consider a setting where online advertisers seek to acquire impressions from an advertising exchange through a multitier network of intermediaries, and study the mechanisms offered by the ad exchange and intermediaries when the advertisers’ values are private. Academic/practical relevance : As opposed to traditional manufacturer/retailer settings, intermediaries in display advertising auction off contingent goods that they purchase only if downstream buyers signal interest. This motivates our study of how intermediaries should bid on behalf of their customers in the mechanism of an upstream intermediary and how the structure of the intermediation network affects the profits of its participants. Methodology : We provide a game-theoretic model to study the mechanisms offered by the ad exchange and intermediaries within a practically relevant class of mechanisms. Results : We characterize a subgame perfect equilibrium of the game among the intermediaries and the seller, and show that the equilibrium mechanisms have a simple and appealing structure: intermediaries bid the virtual value associated with the maximum downstream report in the upstream intermediary’s mechanism, whenever this quantity is positive. Managerial implications : We show that economic incentives are not necessarily aligned along the network and that the position in the intermediation network has a significant impact on the profits of the intermediaries. That is, when advertisers’ value distribution has a “light tail,” upstream intermediaries profit more (relative to downstream ones). Moreover, as the tail of the advertisers’ value distribution gets heavier, downstream intermediaries profit more, and their profits eventually exceed those of upstream ones. In addition, we show that a horizontal merger may not be profitable for intermediaries, and we analyze the impact of market size on the profits of intermediaries.

Impact of External Assistance Programs on Supply Chain Energy Efficiency: A Behavioral Investigation

Problem Definition: We take a behavioral perspective to examine the two-stage energy efficiency (EE) investment decision process that many small-and-medium-sized manufacturers (SMMs) face and the potential benefit that external assistance programs provide in both increasing the propensity to take on an assessment and choosing an appropriate EE investment level. Academic/Practical Relevance: A significant portion of energy efficiency improvement opportunities remain dormant at SMMs. External assistance programs are designed to help encourage SMMs to overcome the initial assessment hurdle. However, it is unclear if the source of such programs, whether offered by a downstream buyer or a third-party organization, results in different behavioral outcomes. This study provides insights for policymakers looking to design more effective external assistance programs. Methodology: We use analytical models and behavioral theory to develop a set of hypotheses concerning the impact of two types of external assistance programs. These hypotheses are further informed and tested through three sets of human experiments using participants from MTurk. Results: We confirm the anecdotal observation that, without any external intervention, a significant portion of profitable assessments remains dormant. Although third-party or buyer-offer assessment assistance programs perform equally well in increasing the propensity to conduct a profitable assessment, a buyer-offer program appears to be more efficient as it results in a higher portion of self-financed assessment, i.e., less free-riding. In the investment stage, we observed that investments are not influenced by the assessment cost. However, SMMs who self-finances or uses third-party assistance are prone to apply the representative heuristic and so, tend to under-invest (over-invest) when the assessment reveals highly (less) profitable EE opportunities. A buyer-offered assistance program could, interestingly, alleviate this behavioral bias, leading to investments that align better with the expected profit maximizing levels. Managerial Implications: Our results suggest that it can be more cost-efficient and effective for third-party organizations to collaborate with buyers in providing assistance and managing information instead of providing free assessments directly to SMMs, which is often the case in practice. This is because a buyer-offered assistance program could achieve the same supply chain EE results without having to inject extra cash to cover the assessment cost.

Measuring the Input Rank in Global Supply Networks

We introduce the Input Rank as a measure of relevance of direct and indirect suppliers in Global Value Chains. We conceive an intermediate input to be more relevant for a downstream buyer if a decrease in that input’s productivity affects that buyer more. In particular, in our framework, the relevance of any input depends on: i) the network position of the supplier relative to the buyer, ii) the patterns of intermediate inputs intensities connecting the buyer and the supplier, iii) and the competitive pressures along supply chains. After we compute the Input Rank from both U.S. and world Input-Output tables, we provide useful insights on the crucial role of services inputs as well as on the relatively higher relevance of domestic suppliers and suppliers coming from regionally integrated partners. Finally, we test that the Input Rank is a good predictor of vertical integration choices made by 20,489 U.S. parent companies controlling 154,836 subsidiaries worldwide.

An Economic Model of Patent Exhaustion

The doctrine of patent exhaustion implies that the authorized sale of patented goods “exhausts” the patent rights in the goods sold and precludes additional license fees from downstream buyers. Courts have considered absolute exhaustion, in which the patent owner forfeits all rights upon an authorized sale, and presumptive exhaustion, in which the patent owner may opt-out of exhaustion via contract. This paper offers the first economic model of domestic patent exhaustion that incorporates transaction costs in licensing downstream buyers and considers how the shift from absolute to presumptive exhaustion affects social welfare. We show that when transaction costs are high, the patent owner has no incentive to individually license downstream users, and absolute and presumptive exhaustion regimes are equivalent. But when transaction costs are at the intermediate level, the patent owner engages in mixed licensing, individually licensing high-valuation buyers and uniformly licensing low-valuation buyers. Presumptive exhaustion is socially optimal when social benefits from buyer-specific pricing outweigh social costs from transaction cost frictions in individualized licensing, which requires sufficiently low transaction costs.

Blockchain Adoption for Traceability in Food Supply Chain Networks

Innovative retailers in food supply chains have been exploring blockchain-based tracing systems as part of an ongoing effort to reduce contamination risks and food waste. We develop a three-tier supply chain model with multiple upstream (tier-2) suppliers to investigate: how blockchain adoption affects incentives of supply chain members, and whether and how its anticipated benefits can be realized. We find that blockchain-enabled full traceability brings direct revenue benefit to every supply chain member by saving uncontaminated food from disposal (pure traceability effect), but also leaves each tier of the supply chain vulnerable to its immediate downstream buyer’s exploitation through strategically lowering the purchasing price (strategic pricing effect). The interplay of the two effects may result in some of the supply chain members (even the retailer) being worse off with blockchain adoption, and the system being exposed to higher contamination risk; the latter is due to the weakened upstream supplier’s incentive to exert contamination risk-reduction effort. Moreover, we find that the supply chain network structure also influences the benefit distribution of blockchain adoption: The retailer always benefits from blockchain adoption in network structures where the tier-1 supplier’s strategic pricing power is eliminated or weakened; all supply chain members benefit from blockchain adoption in a network with a large number of tier-2 suppliers. Finally, we show that alternative risk-mitigation schemes such as tier-2 coordination can diminish the value of blockchain adoption, and partial traceability enabled by tier-1 product inspection can be more beneficial to the retailer than blockchain-enabled traceability.

An Economic Model of Patent Exhaustion

The doctrine of patent exhaustion implies that the authorized sale of patented goods “exhausts” the patent rights in the goods sold and precludes additional license fees from downstream buyers. Courts have considered absolute exhaustion, in which the patent owner forfeits all rights upon an authorized sale, and presumptive exhaustion, in which the patent owner may opt-out of exhaustion via contract. This paper offers the first economic model of domestic patent exhaustion that incorporates transaction costs in licensing downstream buyers and considers how the shift from absolute to presumptive exhaustion affects social welfare. We show that when transaction costs are high, the patent owner has no incentive to individually license downstream users, and absolute and presumptive exhaustion regimes are equivalent. But when transaction costs are at the intermediate level, the patent owner engages in mixed licensing, individually licensing high-valuation buyers and uniformly licensing low-valuation buyers. Presumptive exhaustion is socially optimal when social benefits from buyer-specific pricing outweigh social costs from transaction cost frictions in individualized licensing, which requires sufficiently low transaction costs.

An empirical examination of the use of bargaining power and its impacts on supply chain financial performance

This study empirically examines how benefits of resource dependence may be bargained away by supply chain finance (SCF) costs incurred to upstream suppliers and downstream buyers through cash conversion cycles. We found that a focal firm may get compensated for its resource contribution with an extra share of the financial gains by using the superior bargaining position over its supply chain partners. Nevertheless, the focal firm may proactively restrain its use of bargaining power when the need for cooperative relationship with its supply chain partners prevails. Managerial and research implications for the introduction of power theory and relation theory to the SCF studies are discussed.

A single-vendor multi-buyer production remanufacturing inventory system under a centralized consignment arrangement

The reuse/remanufacturing of economically viable used products that are collected from the end customer has emerged as an inherent part of many supply chain operations due primarily to increased customers awareness and recent environmental protection legislations. This paper considers the environmentally friendly approach of remanufacturing, in the context of a two stage closed loop supply chain comprised of a single vendor and multi buyers where all parties involved operate under a centralized consignment stock agreement. We first develop a mathematical model for this production remanufacturing inventory system and then carry out a thorough model analysis leading to the proof of global optimality of the solutions. We further illustrate the model using several numerical examples followed by a sensitivity analysis that seeks to investigate the impact of key model parameters on the optimal solutions. The obtained results indicate that as the vendor’s setup cost increases relative to the buyers’ ordering cost, the system opts for producing larger lots per setup since this better complies with the economies of scale. The percentage of returned items as well as the holding costs are also found to be key parameters greatly impacting the production lot sizing and the shipping policy of the end item to the downstream buyers.

The Effect of Sourcing Policies on Suppliers’ Sustainable Practices

To meet the growing demand for sustainably produced products, firms must be able to source sustainably produced parts from their suppliers. In this study, we analyze how a buyer (manufacturer or retailer) can use sourcing policies to influence their suppliers to adopt sustainable processes that can meet certain sustainability criteria. We study two sustainable sourcing policies commonly observed in practice, which influence suppliers’ process decisions by committing to offer sustainable products. Under a Sustainable Preferred policy, a buyer commits to offering a sustainable product if she can source sustainably produced parts from the supplier, but will otherwise offer a conventional product. In contrast, under a Sustainable Required sourcing policy, a buyer will only offer a sustainable product, and therefore will only source from the supplier if he has adopted a sustainable process. Our results offer insights for managers by identifying how these sustainable sourcing policies influence upstream suppliers to switch to a sustainable process, and how this affects the ability of a downstream buyer to offer a sustainable product. We find that when the buyer sources from a sole supplier, the Preferred policy can deter the supplier from switching as compared to when the buyer remains noncommittal. However, only the Required policy can induce the supplier to switch. In contrast, when a buyer has multiple suppliers, the Preferred policy does not deter the supplier, but can induce him to switch to a sustainable process, similar to the Required policy. Accordingly, our results suggest that to induce the supplier to switch to a sustainable process, a buyer should adopt a Required policy when sourcing from a sole supplier, but utilize a Preferred policy when there are multiple suppliers.

Buyer-supplier relational strength and buying firm's marketing capability: An outside-in perspective

Extant literature in marketing capability with an inside-out perspective stresses existing internal resources as the basis for developing marketing capability. This study, taking an outside-in perspective, argues that starting from external environment and developing strong buyer-supplier relationship can help formulate strong marketing capability of the buying firm. Using survey data from 199 Chinese manufacturing buyers who identified 937 suppliers, we found that strong buyer-supplier relationship can breed strong supplier information sharing and supplier flexibility, which fully mediate the effect of buyer-supplier relationship on buying firms' marketing capability. The findings provide support to the outside-in approach and reveal how external inter-firm relationship can be turned into intra-firm capability, and suggest that strong upstream buyer-supplier relationship can be a necessity for building downstream buyers' marketing capabilities. The findings also suggest an alternative strategy for developing marketing capabilities starting from external suppliers, and may help close the gap between marketing capability and dynamic external environment.

A hybrid form of agricultural organization: the case of the Beizhijiang vegetable cooperative in China

Farmer cooperatives in China have been developing a hybrid form of governance with features that are seldom observed in other countries. The Beizhijiang vegetable cooperative (hereafter BZJ cooperative), which was founded in 2009, is a case in point. The chairperson of the BZJ cooperative has dominant control over the decision-making and income rights of the cooperative and is also president of the Pangu corporation, a downstream buyer of BZJ products. The purpose of this case study is to allow students to understand the special form of the cooperative in a Chinese context and to compare it to the International Cooperative Association principles regarding cooperatives. This article is aimed at senior undergraduate and graduate students in agribusiness management and agricultural economics and has practical value for agricultural enterprises and related governmental departments.

Willingness of beef finishers to participate in supply chain collaborations

Purpose The purpose of this paper is to examine the factors that influence beef farmers’ willingness to participate in supply chain collaboration initiatives and to identify attributes in formal and non-formal agreements that would encourage or discourage participation. Design/methodology/approach A face-to-face survey containing a choice experiment was carried out. Respondents were selected using stratified sampling among beef finishers in Northern Ireland. Logistic regressions were employed to examine the factors associated with willingness and agreement attributes. Findings Larger and more specialised farms, as well as farmers with higher education attainment are shown to be more likely to participate in collaboration arrangements with downstream buyers. The choice experiment results suggest that farmers are in general willing to fulfil some feeding requirements in order to earn a premium, while a minimum price guarantee is not attractive. The positive valuation of data sharing between farms and abattoirs is found specifically among farmers with higher qualifications. Although education is shown to have positive impacts on both participation in collaboration agreements and the valuation of contract attributes, the level of education associated with the positive impacts differ. In addition, farmers who have enroled in agri-environmental schemes view the requirement of a written contract more favourably than those who have not. Originality/value The study adds to the understanding of how beef farmers view participation within supply chain collaborations and also how the potential features of the collaboration relate to characteristics of farmers and their farms.

Nonlinear Pricing by a Dominant Firm under Competition

We consider a nonlinear pricing problem faced by a dominant firm which competes with a capacity-constrained minor firm for a downstream buyer who may purchase the product from the firms under complete information. Specifically, we analyze a three-stage game in which the dominant firm offers a general tariff first and then the minor firm responds with a per-unit price, followed by the buyer choosing her purchases. By establishing an equivalence between the subgame perfect equilibrium of our asymmetric competition game and the optimal mechanism in a “virtual” principal-agent model, we characterize the dominant firm's optimal nonlinear tariff, which exhibits convexity and yet can display quantity discounts. Our analysis provides a rationale for nonlinear pricing under competition in the absence of private information: The dominant firm can use unchosen offers to constrain its rival’s possible deviations and extract more surplus from the buyer. Antitrust implications are also discussed.

Increasing Concentration in the Agricultural Supply Chain: Implications for Market Power and Sector Performance

Increasing consolidation and vertical coordination in the food chain have made the prospect of market power abuses by powerful food manufacturers and retailers an issue and a policy concern worldwide, in terms of potential impacts on farmer and consumer welfare and sector efficiency. We address the extent to which traditional wisdom and standard conceptual and empirical models that have girded thought about market power in the food chain for decades apply in modern food-market contexts and examine recent work on competition in the food chain to gauge the most promising paths forward. A key conclusion is that considerations that go beyond the bounds of standard models likely cause market power to be less than would be predicted based on the highly concentrated structures of many modern agricultural and food markets. These considerations include downstream buyers who rationally internalize long-run implications of their pricing decisions to farmers, powerful food manufacturers and retailers who countervail each other's market power, and the complex pricing decisions of multistore and multiproduct food retailers.

The Network Structure of Bad Jobs: How Market Constraint Undermines Job Quality

Power and dependence in economic exchange shape companies’ strategy. When firms or industries are heavily dependent on concentrated and powerful upstream suppliers or downstream buyers, this can co...

Multi-business Firms, Resource Redeployment and Transaction Costs

This paper analyzes how changes in sales growth rates in a particular product niche imply corresponding changes with the opposite sign in other product niches of the same portfolio of a multi-business firm. When this correspondence happens, we argue that we are detecting a process of resource redeployment executed by diversifiers. We analyze the drink industry by exploiting tax changes in the alcoholic segments to create exogenous demand variation. We discover that the process of redeployment is particularly visible when the downstream buyer industry (supermarket) is concentrated and when specialized competition inside the focal product niche (i.e., beer) is fragmented. We argue that this evidence is consistent with a transaction costs view that assumes diversified companies more efficient in reallocating resources vis-à-vis the market.

The Origins of Firm Heterogeneity: A Production Network Approach

This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.

Collaborative replenishment in the presence of intermediaries

In complex supply chains, downstream buyers would often replenish individually from intermediaries instead of directly dealing with original manufacturers. Although collaborative replenishment from intermediaries might generate benefits, significant cost reductions could be achieved when direct replenishments from manufacturers are considered. This paper constructs a general model to study collaborative replenishment in multi-product chains with alternative sources of supply—i.e., manufacturers and intermediaries. A collaborative organization determines the optimal choices of replenishment sources on behalf of its members to minimize collective costs. We introduce a class of cooperative games associated with these situations and give sufficient conditions for their concavity. We investigate the choice of allocation rule and its effect on supply chain efficiency when buyers strategically participate in the collaborative organization. We prove that the Shapley value coordinates the supply chain, i.e., it makes complete participation the best strategy for buyers even under asymmetric information. This setting is compared with an alternative structure where buyers can only collaborate in source-specific replenishment organizations that purchase all requested products either from intermediaries or manufacturers. Although there are always participation strategies that result in minimum collective cost, it is impossible to find allocation rules for source-specific replenishment organizations that always motivate the buyers to choose such strategies.

Multichannel Distribution Strategy: Selling to a Competing Buyer with Limited Supplier Capacity

We study the optimal distribution strategy of a supplier with limited capacity. The supplier may adopt the supplier-only role, be the solo seller in the market, or use the dual-channel strategy and compete with its downstream buyer. In comparison to the case of unlimited capacity, we show that the supplier, the buyer, and consumers may all benefit from the supplier’s limited capacity at the same time, leading to a “win-win-win” outcome. We also find that, under limited capacity, the downstream buyer may order the supplier’s entire capacity and strategically withhold some supply from being sold to the market even if there is no underlying supply-side or demand-side uncertainty. Our result points to a new form of strategic purchasing behavior by the buyer in the face of upstream and downstream competition. Interestingly, we show that while buyer withholding is always beneficial for the supplier, it can reduce the buyer’s profit under certain cases, although total supply chain profit is the first-best outcome. Also, counter to conventional antitrust concerns, buyer withholding at times may benefit consumers in spite of reduced downstream competition. Finally, in contrast to intuition, we find that the supplier’s benefit from investing in direct selling capability is highest when its capacity size is moderate and not large. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2702 . This paper was accepted by Gad Allon, operations management.

Raising Rivals' Costs Through Cartel Detection - Why Downstream Buyers Rather Face an Upstream Cartel than Downstream Competition

This paper analyses how the endogenous detection of an upstream cartel by a down-stream buyer allows the detecting firm to raise rivals' cost. We model a market with a vertical structure, where a stable all-inclusive cartel is operating in the upstream market which provides an input to a downstream duopoly. It is assumed that one downstream firm detects the cartel, while the existence of the cartel remains unknown to its competitor. The model shows that the detecting firm can strategically use its information advantage to decrease its own cost and thereby increase its rivals cost relatively to the detecting firms' cost.