Timing of RFID Adoption in a Supply Chain

Abstract

This paper studies the incentives behind the adoption of radio-frequency identification (RFID) in a supply chain. One prominent feature of RFID technology is that once RFID tags are attached on the items at an upstream site, the same tags can be reused at its downstream sites at lower or zero variable cost. This creates an interesting, one-sided “free-rider” problem, where the downstream would wait to free-ride on the upstream's first move, but not vice versa. Using a stylized game-theoretic model, we characterize the equilibrium strategies of the two firms. Compared to the first-best solution, firms in equilibrium tend to adopt too late. We then study the dual benefits of technology coordination between the two firms and find that it would not only save redundant costs of putting tags, but also speed up the downstream's RFID adoption. We also show that the equal-cost-split arrangement shifts the benefit of free-riding to the upstream, thereby mitigating the negative impacts in many cases. But it may distort the market when it operates in the optimal manner. The general message of the model is that technology coordination and cost-split each contribute to the mitigation of the free-rider problem in RFID adoption.

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