The Impact of Valuation Heterogeneity on Equilibrium Prices in Supply Chain Networks

Abstract

This paper studies bargaining in two‐sided supply chain networks where manufacturers on the demand side purchase an input from suppliers on the supply side. The manufacturers may have heterogeneous valuations on the input sold by the suppliers. In such a supply chain network, a manufacturer and a supplier must have a business relationship or “link” to bargain and trade with each other. However, a firm on one side of the supply chain network might not have a business relationship with every firm on the other side of the supply chain network. We show that valuation heterogeneity, supply and demand balance, and network structure are the main factors that influence the equilibrium prices, trading pattern, and surplus allocation in such a supply chain network. Valuation heterogeneity among manufacturers can mitigate unfavorable supply and demand balance to protect some surplus for the manufacturers and leads to higher price dispersion in the supply chain network. We demonstrate that bargaining effectively takes place in smaller subnetworks in a general supply chain network and develop an algorithm to decompose the general network into these smaller subnetworks, which simplifies the analysis of the general supply chain network significantly. We then identify types of supply chain networks that are efficient so that only manufacturers with the highest valuations are able to trade and types of links that can be added into a supply chain network to improve its efficiency.

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