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Vertical Contracts in a Supply Chain and the Bullwhip Effect

Author

Listed:
  • Zhan Qu

    (Faculty of Business and Economics, University of Göttingen, 37073 Göttingen, Germany)

  • Horst Raff

    (Department of Economics and Kiel Centre for Globalization, Kiel University, 24118 Kiel, Germany)

Abstract

This paper shows that decentralized supply chains, in which upstream firms use linear wholesale prices, may experience lower upstream production and downstream sales volatility than vertically integrated supply chains and may be less susceptible to the bullwhip effect by which the variance of upstream production exceeds the variance of downstream sales. The reason is that decentralized supply chains exhibit a price effect , whereby upstream producers raise wholesale prices in the case of positive demand shocks and lower wholesale prices in the case of negative demand shocks. Whereas upstream producers benefit from the price effect and, thus, from a dampening of the bullwhip effect, downstream firms may lose, and overall supply chain profit may decrease.

Suggested Citation

  • Zhan Qu & Horst Raff, 2021. "Vertical Contracts in a Supply Chain and the Bullwhip Effect," Management Science, INFORMS, vol. 67(6), pages 3744-3756, June.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:6:p:3744-3756
    DOI: 10.1287/mnsc.2020.3630
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    References listed on IDEAS

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