Blockchain Adoption in a Supply Chain with Market Power

Fahad Saleh, Garud Iyengar, Jay Sethuraman, Wenjun Wang - Jun 30, 2022

Working Paper No.  00079-00

We examine a supply chain with a single risk-averse manufacturer who purchases from vendors and sells to consumers. Within this context, we establish two channels that drive blockchain adoption by the manufacturer: manufacturer risk aversion and consumer information asymmetry. With regard to the first channel, blockchain enables efficient tracing of defective products so that the manufacturer can selectively recall defective products rather than conducting a full recall. This tracing ability reduces the risk involved in the manufacturer purchasing from multiple vendors and thereby leads the manufacturer to endogenously diversify across vendors when blockchain is adopted. The diversification enhances the manufacturer's welfare due to her risk aversion and thus drives her to adopt blockchain. With regard to the second channel, blockchain stores details from the manufacturing process and reveals them to consumers, thereby ameliorating consumer information asymmetry. This reduction in information asymmetry enables improved consumer decision-making and thereby increases consumer welfare. The manufacturer responds optimally by increasing the consumer price which transfers a portion of the consumer's welfare gain to the manufacturer, enhancing manufacturer welfare and serving as a second channel to drive blockchain adoption by the manufacturer.

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Blockchain supply chain market power

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Blockchain Adoption in a Supply Chain with Manufacturer Market Power