Effect of interest rates on supply chain contract selection
Abstract
We examine the effect of interest rates on index-based (IB) contracts. Specifically, we first explore how interest rates influence the selection of supply chain contracts and then analyse the contract equilibria in competitive scenarios. We consider a two-stage supply chain model involving two manufacturers supplying distinct but substitutable products to two retailers. Each manufacturer offers two contract options: a no-change price (NC) contract, serving as a benchmark, and an IB contract. The contract selection process is modelled as a two-stage Stackelberg game. We demonstrate that the manufacturers’ profits are a decreasing convex function of the interest rate when it is incorporated into the IB contract. However, whether an IB contract has a positive effect on the rival manufacturer depends on the demand uncertainty and the correlation between the spot prices of the two products. At the equilibria of the contract game, differentiated contracts are found to exist. When the manufacturer offers an IB contract without interest rates, its impact on the rival manufacturer is either unconditionally positive or neutral. In situations where the spot prices of the two commodities exhibit a positive correlation, both manufacturers will choose to offer IB contracts.