Blockchain Adoption in a Supply Chain with Manufacturer Market Power

Fahad Saleh, Garud Iyengar, Jay Sethuraman, Wenjun Wang , - Oct 17, 2023

Working Paper No.  00079-01

We examine a supply chain with a single risk-averse manufacturer who purchases from suppliers and sells to consumers. Within this context, we focus on 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 suppliers and thereby leads the manufacturer to endogenously diversify across suppliers 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 improves consumer decision-making which, in isolation, would enhance consumer welfare. However, the manufacturer responds by increasing the consumer price, thereby transferring potential consumer welfare gains to the manufacturer, and consequently 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 Market Power