Foundations and Trends® in Technology, Information and Operations Management > Vol 11 > Issue 1-2

A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers

René Caldentey, Booth School of Business, The University of Chicago, USA, Rene.Caldentey@chicagobooth.edu Martin Haugh, Imperial College Business School, UK, m.haugh@imperial.ac.uk
 
Suggested Citation
René Caldentey and Martin Haugh (2017), "A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers", Foundations and Trends® in Technology, Information and Operations Management: Vol. 11: No. 1-2, pp 124-143. http://dx.doi.org/10.1561/0200000075

Published: 21 Dec 2017
© 2017 R. Caldentey and M. Haugh
 
Subjects
 
Keywords
G20 Financial ServicesG32 Financial Risk and Risk ManagementM11 Production management
Operational risk managementContingency planningCommodity price riskSupply chain disrutpions
 

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In this article:
1. Introduction
2. Model Formulation
3. Cournot-Stackelberg Solution
4. Competition in the Retailers’ Market
5. Concluding Remarks and Future Research
References

Abstract

We study the performance of a supply chain where N retailers and a single producer compete in a Cournot-Stackelberg game. We assume the retailers are budget-constrained and their profits depend on the realized path of some tradeable (stochastic) economic index. The supply chain might therefore be more profitable if the retailers were able to reallocate their budgets across different states of nature. In order to affect such a reallocation, we assume the retailers are able to trade dynamically in the financial market. We solve the Cournot-Stackelberg equilibrium when the retailers have identical budgets and study the impact that competition and hedging have on the supply chain and on the various players including the firms themselves, the end consumers and society as a whole. We show, among other things, that when the retailers can hedge there exists an optimal level of competition, ¯N , that is often finite and optimal from the perspective of the consumers, the firms and society as a whole. In contrast, when the retailers cannot hedge, these welfare measures are uniformly increasing in N.

DOI:10.1561/0200000075
ISBN: 978-1-68083-378-2
230 pp. $99.00
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ISBN: 978-1-68083-379-9
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Table of contents:
Integrated Risk Management in Supply Chains: Overview and Future Directions
Part 1: Buffering Supply Chain Risk with Operational Flexibility
The Interaction between Operational Flexibility and Financial Flexibility
Investments in Lead-Time Reduction: How to Finance and How to Implement
Part 2: Supply Disruption
Operational Hedging through Dual-Sourcing under Capacity Uncertainty
Managing Supply Risk in Fixed Price Contracts: A Contingent Claims Perspective
Part 3: Commodity Price Risk
Integrated Production Planning and Risk Hedging
Minimum-Variance Hedging for Managing Risks in Inventory Models with Price Fluctuations
A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers
Approximations for High Dimensional Commodity and Energy Merchant Operations Models
Linking Commodity Price Risk and Operations: Evidence from the Gold Mining Industry

Integrated Risk Management in Supply Chains

Integrated Risk Management in Supply Chains examines supply chain risk management. The increased interest in the topic is due to a number of factors including the increased volatility of commodity prices and exchange rates, recent natural disasters, and the increased importance of multinational corporations. The motivation for risk management comes from a variety of sources: financial distress costs, managerial incentives, and other important reasons discussed in the remainder of this book. Understanding the motives is important because they provide insights into which risks should be managed and how a firm’s risk management operations should be organized.

The first part examines Buffering Supply Chain Risk with Operational Flexibility and deals with uncertainty in the form of routine variability, which includes fluctuations in demand. Part 2 reviews Supply Disruption. Both the preponderance of natural disasters and huge economic swings can cause extreme challenges across the supply chains. Although these types of risks are rare, they are highly consequential and buffering is insufficient to mitigate them. Instead, firms facing these risks must engage in contingency planning and must maintain redundancies in the system. This is why contingency planning is on the interface of operations and finance. Part 3 looks at Commodity Price Risks, which includes five papers on managing price risks – the first three papers are fundamental in that they ask “when” and “how” firms should manage price risks with hedging and how hedging affects operating policy and the remaining two papers examine the best practices in specific industries.

 
TOM-075

Companion

Foundations and Trends® in Technology, Information and Operations Management, Volume 11, Issue 1-2 Special Issue: Integrated Risk Management in Supply Chains
See the other articles that are also part of this special issue.