A Cournot-Stackelberg Model of Supply Contracts with Financial Hedging and Identical Retailers

Abstract

We study the performance of a supply chain where N retailers and a single producer compete in a Cournot-Stackelberg game. We assume the retailers are budget-constrained and their profits depend on the realized path of some tradeable (stochastic) economic index. The supply chain might therefore be more profitable if the retailers were able to reallocate their budgets across different states of nature. In order to affect such a reallocation, we assume the retailers are able to trade dynamically in the financial market. We solve the Cournot-Stackelberg equilibrium when the retailers have identical budgets and study the impact that competition and hedging have on the supply chain and on the various players including the firms themselves, the end consumers and society as a whole. We show, among other things, that when the retailers can hedge there exists an optimal level of competition, ¯N that is often finite and optimal from the perspective of the consumers, the firms and society as a whole. In contrast, when the retailers cannot hedge, these welfare measures are uniformly increasing in N.