Article ID: | iaor2006104 |
Country: | Netherlands |
Volume: | 162 |
Issue: | 3 |
Start Page Number: | 762 |
End Page Number: | 772 |
Publication Date: | May 2005 |
Journal: | European Journal of Operational Research |
Authors: | Gerchak Yigal, Cho Richard K. |
Keywords: | investment |
We endow the downstream firm in a supply chain with operating costs in addition to the traditional overage and underage costs. We reanalyze Lariviere and Porteus's “Selling to a Newsvendor” model, allowing for non-linear production costs, and provide comparative statics. We then explore investment in reducing downstream operating costs. To overcome the fact that investment is lower in a decentralized chain than in an integrated one, we propose several coordination mechanisms – buybacks, revenue sharing and operating subsidy with a license fee.