Publisher Summary This chapter reviews the supply chain coordination with contracts. Numerous supply chain models are discussed. In each model, the supply chain optimal actions are identified. The chapter extends the newsvendor model by allowing the retailer to choose the retail price in addition to the stocking quantity. Coordination is more complex in this setting because the incentives provided to align one action might cause distortions with the other action. The newsvendor model is also extended by allowing the retailer to exert costly effort to increase demand. Coordination is challenging because the retailer's effort is noncontractible—that is, the firms cannot write contracts based on the effort chosen. The chapter also discusses an infinite horizon stochastic demand model in which the retailer receives replenishments from a supplier after a constant lead time. Coordination requires that the retailer chooses a large basestock level.

Supply Chain Coordination with Contracts

Supply chain coordination: Perspectives, empirical studies and research directions

We investigate the role of options (contingent claims) in a buyer-supplier system. Specifically using a two-period model with correlated demand, we illustrate how options provide flexibility to a buyer to respond to market changes in the second period. We also study the implications of such arrangements between a buyer and a supplier for coordination of the channel. We show that, in general, channel coordination can be achieved only if we allow the exercise price to be piecewise linear. We develop sufficient conditions on the cost parameters such that linear prices coordinate the channel. We derive the appropriate prices for channel coordination which, however, violate the individual rationality constraint for the supplier. Contrary to popular belief (based on simpler models) we show that credit for returns offered by the supplier does not always coordinate the channel and alleviate the individual rationality constraint. Credit for returns are useful only on a subset of the feasibility region under which channel coordination is achievable with linear prices. Finally, we demonstrate (numerically) the benefits of options in improving channel performance and evaluate the magnitude of loss due to lack of coordination.

Coordination and Flexibility in Supply Contracts with Options

We investigate a two-stage serial supply chain with stationary stochastic demand and fixed transportation times. Inventory holding costs are charged at each stage, and each stage may incur a consumer backorder penalty cost, e.g. the upper stage (the supplier) may dislike backorders at the lower stage (the retailer). We consider two games. In both, the stages independently choose base stock policies to minimize their costs. The games differ in how the firms track their inventory levels (in one, the firms are committed to tracking echelon inventory; in the other they track local inventory). We compare the policies chosen under this competitive regime to those selected to minimize total supply chain costs, i.e., the optimal solution. We show that the games (nearly always) have a unique Nash equilibrium, and it differs from the optimal solution. Hence, competition reduces efficiency. Furthermore, the two games' equilibria are different, so the tracking method influences strategic behavior. We show that the system optimal solution can be achieved as a Nash equilibrium using simple linear transfer payments. The value of cooperation is context specific: In some settings competition increases total cost by only a fraction of a percent, whereas in other settings the cost increase is enormous. We also discuss Stackelberg equilibria.

/pdf/competitive-and-cooperative-inventory-policies-in-a-two-3j2oxban4f.pdf

Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain

Coordination mechanisms of supply chain systems

This paper constructs a new data set of repeated sales of artworks and estimates an annual index of art prices for the period 1875-2000. Contrary to earlier studies, we find art outperforms fixed income securities as an investment, though it significantly under-performs stocks in the US. Art is also found to have lower volatility and lower correlation with other assets, making it more attractive for portfolio diversification than discovered in earlier research. There is strong evidence of underperformance of masterpieces, meaning expensive paintings tend to underperform the art market index. The evidence is mixed on whether the "law of one price" holds in the New York auction market.

/pdf/art-as-an-investment-and-the-underperformance-of-1e3xv0eil1.pdf

Art as an Investment and the Underperformance of Masterpieces

This paper constructs a new data set of repeated sales of artworks and estimates an annual index of art prices for the period 1875-2000. Contrary to earlier studies, we find art outperforms fixed income securities as an investment, though it significantly under-performs stocks in the US. Art is also found to have lower volatility and lower correlation with other assets, making it more attractive for portfolio diversification than discovered in earlier research. There is strong evidence of underperformance of masterpieces, meaning expensive paintings tend to under-perform the art market index. The evidence is mixed on whether the "law of one price" holds in the New York auction market.

/pdf/art-as-an-investment-and-the-underperformance-of-377xqjj7uq.pdf

This study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long-term performance of artworks. We find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years. High estimates at the time of purchase are associated with adverse subsequent abnormal returns. Moreover, the estimation error for individual paintings tends to persist over time. These results are consistent with the view that auction house price estimates are affected by agency problems and that

http://people.stern.nyu.edu/jmei/estimates.pdf

Vested Interest and Biased Price Estimates: Evidence from an Auction Market

The problem is to determine a review period and stocking policy that are mutually beneficial to a producer and a retailer. In our model, the retailer uses a periodic review, base stock policy for ordering the item from the producer's Distribution Center (DC). Excess customer demand is assumed to be lost. A make-to-order production system supplies to the DC. We show that given a review period, unless the manufacturer agrees to share the cost of carrying a fraction of the safety stocks at the retailer, the two will not agree upon the level of stocks to be carried in the store. We prove that there is an equilibrium value for this fraction, such that the retailer and the manufacturer are always in agreement with regard to the stocking level. We then show that complete coordination on the stocking level as well as the review period can be achieved solely through carrying out negotiations on credit terms. These theoretical results are used to construct an algorithm for calculating the optimal policy parameters ...

https://pages.stern.nyu.edu/%7Esseshadr/journalArticles/policy_mechanisms_for_supply.pdf

Policy mechanisms for supply chain coordination

While there are no significant investment characteristics that inhibit art from being considered as an asset, a major hurdle has long been the lack of a systematic measure of its financial performance. Due to its heterogeneity (each piece is different) and its infrequency of trading (the exact same piece does not come to the market very often), the determination of changes in market value is difficult to ascertain. Two estimation methods are commonly used to construct indices. Repeat-sales regression (RSR) uses prices of individual objects traded at two distinct moments in time. If the characteristics of an object do not change (which is usually so for collectibles), the heterogeneity issue is bypassed. The basic idea of the hedonic regression (HR) method is to regress prices on various attributes of objects (dimensions, artist, subject matter, etc.) and to use the residuals of the regression which can be considered as "characteristic-free prices" to compute the price index. The chapter deals with the basics of hedonic and repeat-sales estimators, and tries to interpret in economic terms what both are trying to achieve. It also goes into some more technical details which may be useful for researchers who want to construct such indices, and gives some guidelines on how to go about collecting data, and the choice between RSR and HR that this induces. Both methods are compared using simulated returns, pointing to which method should be used given the data at hand.

Michael J. Moses

Papers

Art as an Investment and the Underperformance of Masterpieces

Art as an Investment and the Underperformance of Masterpieces

Vested Interest and Biased Price Estimates: Evidence from an Auction Market

Policy mechanisms for supply chain coordination

The Computation of Prices Indices