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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Nov 17, 2017

Are Strategic Customers Bad for Supply Chain?


We consider a manufacturer serving a retailer that sells its product to customers over two periods. Each firm determines its unit price. The retailer orders the product from the manufacturer prior to the beginning of the selling periods. We consider two types of customers: (1) strategic customers who take their future options into account and time their purchases accordingly and (2) myopic customers who consider only their current options. We compare the resulting equilibria for these two scenarios and evaluate the impact of customers’ strategic behavior. We find that strategic customer behavior always benefits the manufacturer. Interestingly, it may also improve the profitability of the retailer and the entire supply chain in some cases. Strategic customer behavior and decentralization are often regarded as detriments to supply chain performance. We find that, however, the combination of these two factors may not result in the worst supply chain performance. When customers are sufficiently patient, a decentralized supply chain that faces strategic customers actually outperforms the supply chain with only one of those factors at play. Finally, we show that when customers are strategic, the retailer’s and manufacturer’s profits with price commitment, availability commitment, or quick response can be lower than those when customers are myopic.

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