The use of a premium-payment scheme in a supply chain involving capacity acquisition

Document Type

Article

Publication Date

8-16-2007

Abstract

We study a practice whereby a downstream firm makes to his supplier a premium-payment for a certain quantity of products. We show that the adoption of this practice can induce the supplier to build bigger capacity. The higher capacity level enables the supplier to satisfy a larger portion of demands from the downstream firm, and this leads to higher payoffs for both parties in the supply chain. With the assistance of an under-capacity penalty imposed on the supplier, this premium-payment scheme can help lure the parties into taking the channel-optimal actions. Our numerical examples help reveal various features of the scheme. © 2006 Elsevier B.V. All rights reserved.

Identifier

33847305454 (Scopus)

Publication Title

European Journal of Operational Research

External Full Text Location

https://doi.org/10.1016/j.ejor.2006.05.039

ISSN

03772217

First Page

207

Last Page

223

Issue

1

Volume

181

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