LAUSR

Fear of escalating input prices in response to retail success is a commonly-discussed phenomenon affecting supply chains. Such a ratchet effect arises when a retailer feels compelled to modify his investments to better serve the end customers in order to hide positive prospects and restrain future wholesale price hikes. In a two-period model of supply chain interactions, the authors demonstrate that such an endogenous ratchet effect can have multi-faceted reverberations. A retailer fearing price hikes may be tempted to curtail near-term profits to ensure favorable long-term pricing. In response, the supplier can use deep discounts in its initial wholesale prices to convince the retailer to focus on its short-run profits rather than long-run pricing concerns. These deep discounts not only encourage mutually beneficial investments but also alleviate double-marginalization inefficiencies along the supply chain. In light of these results, the authors demonstrate that the mandatory information disclosure policy to reduce the ratchet effect decreases total channel efficiency compared to the case without information disclosure, precisely because mandatory disclosure interrupts the healthy tension among supply chain partners. Thus, the model presents a scenario where ratcheting concerns can create a degree of self-enforcing cooperation that results in socially beneficial responses in supply chains.