Research and Management Insights

Tao Li, Suresh Sethi, and Xiuli He study a decentralized two-period supply chain in which a manufacturer produces a product with benefits of cost learning, and sells it through a retailer facing a price-dependent demand. The manufacturer’s second-period production cost declines linearly in the first-period production, but with a random learning rate. The authors show that as the mean learning rate or the learning rate variability increases, the traditional double marginalization problem becomes more severe, leading to greater efficiency loss in the channel. They obtain revenue sharing contracts that can coordinate the dynamic supply chain. In particular, when the manufacturer may hold inventory, they identify two major drivers for inventory carryover: market growth and learning rate variability.