Pass-through of commodity price shocks in distribution channels with risk-averse agents

We apply variance analysis for studying the risk sharing mechanism in distribution channels, in which the risk-averse buyer and supplier are suffered from commodity price shocks. We obtain the closed-form optimal pass-through rate that minimizes the total channel price/cost risk and maximizes the ch...

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Bibliographic Details
Published in:International journal of production economics 2020-08, Vol.226, p.107609, Article 107609
Main Authors: Luong, Phat V., Xu, Xiaowei
Format: Article
Language:English
Subjects:
CARA
Pass-through
Risk aversion
Stainless steel
Surcharge
Variance analysis
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Summary:We apply variance analysis for studying the risk sharing mechanism in distribution channels, in which the risk-averse buyer and supplier are suffered from commodity price shocks. We obtain the closed-form optimal pass-through rate that minimizes the total channel price/cost risk and maximizes the channel throughput for a Stackelberg leadership game and a Nash bargaining solution. Using the commodity price data in the steel industry, we demonstrate that the pass-through rate should be set between 40 and 80% for major metal alloys.
ISSN:0925-5273
1873-7579
DOI:10.1016/j.ijpe.2019.107609