the allocation of inventory risk in a supply chain push pull and advance purchase discount contracts while every firm in a supply chain bears supply risk the cost of insufficient supply some firms may even with wholesale price contracts completely avoid inventory risk the cost of unsold inventory with a push contract there is a single wholesale price and the retailer by ordering his entire supply before the selling season bears all of the supply chain s inventory risk a pull contract also has a single wholesale price but the supplier bears the supply chain s inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season examples include vendor managed inventory with consignment and drop shipping an advance purchase discount has two wholesale prices a discounted price for inventory purchased before the season and a regular price for replenishments during the selling season advance purchase discounts allow for intermediate allocations of inventory risk the retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount this research studies how the allocation of inventory risk via these three types of wholesale price contracts impacts supply chain efficiency the ratio of the supply chain s profit to its maximum profit it is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts in other words the literature has exaggerated the value of implementing coordinating contracts i e contracts that achieve 100 efficiency such as buy backs or revenue sharing because coordinating contracts are compared against an inappropriate benchmark often just a push contract furthermore if firms also consider advance purchase discounts which are also simple to administer then the coordination of the supply chain and the arbitrary allocation of its profit is possible several limitations of advance purchase discounts are discussed

bayesian new neoclassical synthesis nns models modern tools for central banks this paper discusses the advantages of bayesian new neoclassical synthesis models as tools for monetary policy analysis and forecasting the combination of a sound micro founded structure with a good probabilistic description of the observed data makes those models suitable for investigating the structural sources of business cycle fluctuations for analysing optimal monetary policy responses to those developments and for making economic projections conditional on various policy assumptions the paper gives two examples of such analysis jel e40 e50 c11 copyright c 2005 the european economic association

a model of trade credit in a capital constrained distribution channel abstract in a product market with uncertain demand we examine a distribution channel consisting of one manufacturer and one capital constrained retailer the retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer provided it is also to the latter s benefit to extend trade credit under bank credit financing we show that the channel behaves as if the retailer is not constrained by capital in a wholesale price contract we find that trade credit makes both channel members better off and is the unique financing equilibrium trade credit better integrates the channel than bank credit by centralizing the financing of distribution at the manufacturer we further compare bank versus trade credit under a classical channel contract revenue sharing contract in addition we present a set of numerical experiments to show how product cost internal capital and demand variability impact on the market equilibrium under both bank and trade credits

option pricing with downward sloping demand curves the case of supply chain options this article investigates the role of option contracts in a supply chain when the demand curve is downward sloping we consider call put options that provide the retailer with the right to reorder return goods at a fixed price we show that the introduction of option contracts causes the wholesale price to increase and the volatility of the retail price to decrease in general options are not zero sum games conditions are derived under which the manufacturer prefers to use options when this happens the retailer is also better off if the uncertainty in the demand curve is low however if the uncertainty is sufficiently high then the introduction of option contracts alters the equilibrium prices in a way that hurts the retailer

economic order quantity models for imperfect items with buy and repair options abstract one of the celebrated extensions of the economic order production quantity eoq epq model is one that assumes a received shipment contains a fraction of imperfect non conforming quality items where these items detected by 100 screening are sold as a single batch at a discounted price this paper revisits this model salameh and jaber 2000 int j prod econ 64 1 59 64 and extends it by assuming that a shipment is coming from a distant supplier and therefore it is not feasible to replace the imperfect items with an additional order to the same supplier to address this restriction two models are presented the first assumes that imperfect items are sent to a repair shop who charges a cost plus a markup margin while the second model assumes that imperfect items are replaced by good ones from a local supplier at a higher cost the inventory environment assumed in this paper is relevant in todays globalised supply chains thus practical implications of the problem faced are discussed numerical results are also presented and discussed the results show that there exists a threshold value of the unit purchase cost of an emergency ordered item and a fraction of defectives to which it is decided to either buy or repair

a utility adjusted newsvendor model with stochastic demand abstract we develop a continuous time newsvendor model to determine the optimal inventory level for commodities in an established financial market unlike most models in literature the newsvendor is not necessarily risk neutral and chooses the order quantity that maximises the expected utility of the cash flow at the end of the period the newsvendor exploits the correlation between stochastic demand and the price of the commodities in order to manage risks by investing in a portfolio of financial instruments the decision problem therefore includes not only the determination of the optimal ordering policy but also at the same time the selection of a portfolio that maximises her utility further we demonstrate that our model compared to a myopic approach i e no hedging requires significantly lower levels of inventory buffer to mitigate demand uncertainty thus better utilising capital

coordination of supply chains by option contracts a cooperative game theory approach manufacturer retailer supply chains commonly adopt a wholesale price mechanism this mechanism however has often led manufacturers and retailers to situations of conflicts of interest for example due to uncertain market demand retailers prefer to order flexibly from manufacturers so as to avoid incurring inventory costs and to be able to respond flexibly to market changes manufacturers on the other hand prefer retailers to place full orders as early as possible so that they can hedge against the risks of over and under production such conflicts between retailers and manufacturers can result in an inefficient supply chain motivated by this problem we take a cooperative game approach in this paper to consider the coordination issue in a manufacturer retailer supply chain using option contracts using the wholesale price mechanism as a benchmark we develop an option contract model our study demonstrates that compared with the benchmark based on the wholesale price mechanism option contracts can coordinate the supply chain and achieve pareto improvement we also discuss scenarios in which option contracts are selected according to individual supply chain members risk preferences and negotiating powers

reducing the cost of demand uncertainty through accurate response to early sales traditionally fashion products have incurred high losses due to stockouts and inventory obsolence because long lead times coupled with a concentrated selling season force all or at least most production to be committed before demand information is available under a quick response system lead times are shortened sufficiently to allow a greater portion of production to be scheduled in response to initial demand we model and analyze the decisions required under quick response and give a method for estimating the demand probability distributions needed in our model we applied these procedures with a major fashion skiwear firm and found that cost relative to the current informal response system was reduced by enough to increase profits by 60 relative to the cost that would have been incurred if no response were used optimized response reduces cost by enough to roughly quadruple profits

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

are central banks projections meaningful central banks projections i e forecasts conditional on a given interest rate path are often criticized on the grounds that their underlying policy assumptions are inconsistent with the existence of a unique equilibrium in many forward looking models the present paper describes three alternative approaches to constructing projections that are not subject to that criticism using a standard new keynesian model as a reference framework yet and even though they imply an identical path for the interest rate the three approaches are shown

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

the loss averse newsvendor game abstract this paper extends the standard newsvendor problem based upon risk neutrality to a game setting where multiple newsvendors with loss aversion preferences are competing for inventory from a risk neutral supplier we show that if the supplier allocates the total demand among the newsvendors proportional to their order quantities then there exists a unique nash equilibrium order quantity in this newsvendor game we also find that while the demand stealing effect increases the total order quantity of the newsvendors the loss aversion effect decreases the newsvendors total order quantity and if strong enough may lead to a lower total inventory level of the decentralized supply chain than that of an integrated supply chain

a cost approach to economic analysis under state contingent production uncertainty this article explores the economics of input decision under production uncertainty the article develops a methodology to specify and estimate cost minimizing input decisions under a state contingent technology the analysis is applied to time series data on u s agriculture it finds strong empirical evidence that expected output alone does not provide an appropriate representation of production uncertainty the results provide empirical support for an output cubical technology this indicates that an ex post analysis of stochastic technology appears appropriate the analysis also provides evidence that the cost of facing production risk has declined in u s agriculture over the last few decades copyright 2008 oxford university press

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

capacity reservation contracts for high tech industry abstract capacity reservation provides a risk sharing mechanism that encourages a manufacturer to expand its capacity more we propose a deductible reservation dr contract where customers reserve future capacity with a fee that is deductible from the purchasing price the manufacturer s ex ante announcement of the excess capacity that she will have in addition to the reservation amount is a unique feature of the dr contract an individually rational dr contract that provides channel coordination always exists since there is a unique nash equilibrium for the reservation game among multiple customers the main results of the one customer case can be extended to the n customer case the dr contract is compared with another capacity reservation contract called take or pay while the manufacturer may gain more profit under a take or pay contract there may not be a channel coordinated contract that is also individually rational for the customer finally the similarities and differences between the capacity reservation contracts and other well known supply contracts are discussed

managing product variety with advance selling and capacity restrictions abstract in this research we analyze the impact of advance selling with price discount on a firms ability to maximize the expected profit the production environment of the firm is characterized by short selling cycle multiple products demand variability and capacity restrictions the advance orders are randomly distributed with the parameters dependent on the discount levels under advance selling the advance orders are used to update the demand forecast of selling season and are delivered at the start of the selling season the problem is modeled as a three stage stochastic non linear programming problem we derive the concavity of the problem under customers willingness to buy in advance our solution methodology comprises the variance reduction technique of antithetic variates that gives credible value of price discount levels for different sets of demand values we also provide sensitivity analysis of the problem parameters to derive insights into the behavior of the expected profit and the benefits due to advance selling under capacity restrictions

risk hedging in a supply chain option vs price discount abstract in this research two risk hedging strategies the option contract and the advance purchase discount contract are investigated within a manufacturer retailer two echelon supply chain context this study offers three contributions first the optimal decisions under the two contracts from the perspectives of both the manufacturer and the retailer are determined second circumstances under which supply chain coordination can be reached are identified third the scenario of loss averse manufacturer has been explored the results of the analysis provide practical insights to the manufacturer when she plans production quantity and to the retailer when he replenishes inventory

commodity options purchasing and credit financing under capital constraint abstract this paper investigates a purchasing contract with options under capital constraint and credit support from a financial institution the buyer who has limited capital can buy commodity options and a fixed order and choose to exercise all or part of the options at a later time we characterize the buyer s optimal ordering strategy with limited capital there is one critical value for the capital that is the buyer will only purchase a fixed order when the capital is less than the value with more capital the buyer will reduce the fixed order quantity and increase the option orders until the capital is used up or the global optimization is reached this result implies that the option is a risk hedging tool only for easy finance companies furthermore we find that when the buyer obtains funding from a financial institution such as a bank the buyer s profit will be increased with bank financing and the buyer s optimal purchasing decision will follow the similar policy and order less options and more fixed orders compared with the case when there is sufficient capital numerical examples are provided to demonstrate the theoretical results

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

note the role of returns policies in pricing and inventory decisions for catalogue goods manufacturers often use returns policies to encourage retailers to stock and price items more aggressively we focus on the effect that such policies have on both a retailer s and a manufacturer s profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item such a commitment is often necessary for retailers who sell primarily through catalogues

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

mean variance analysis of option contracts in a two echelon supply chain abstract this paper studies the implications of risk considerations for option contracts in a two echelon supply chain under the mean variance framework we first investigate the conditions for coordinating the supply chain by using option contracts we find that supply chain coordination is not always achieved contrasting with the result that properly designed option contracts can always coordinate a supply chain in the absence of risk considerations second we analyze the stackelberg game for a decentralized supply chain in two cases depending on whether the retailer s risk aversion threshold is known to the supplier we show that when the threshold is public information there exists a unique equilibrium in which the supplier with a higher risk tolerance prefers to reduce the exercise price and thus the retailer s order quantity increases when the retailer s risk aversion threshold is private information the retailer has an incentive to pretend to be less risk averse to curb this incentive distortion we design a new minimum option quantity commitment for the supplier we complement our theoretical results with numerical simulations

the quantity flexibility contract and supplier customer incentives consider a supply chain consisting of two independent agents a supplier e g a manufacturer and its customer e g a retailer the latter in turn serving an uncertain market demand to reconcile manufacturing procurement time lags with a need for timely response to the market such supply chains often must commit resources to production quantities based on forecasted rather than realized demand the customer typically provides a planning forecast of its intended purchase which does not entail commitment benefiting from overproduction while not bearing the immediate costs the customer has incentive to initially overforecast before eventually purchasing a lesser quantity the supplier must in turn anticipate such behavior in its production quantity decision this individually rational behavior results in an inefficient supply chain this paper models the incentives of the two parties identifying causes of inefficiency and suggesting remedies particular attention is given to the quantity flexibility qf contract which couples the customer s commitment to purchase no less than a certain percentage below the forecast with the supplier s guarantee to deliver up to a certain percentage above under certain conditions this method can allocate the costs of market demand uncertainty so as to lead the individually motivated supplier and customer to the systemwide optimal outcome we characterize the implications of qf contracts for the behavior and performance of both parties and the supply chain as a whole