Blockchain Adoption in a Supply Chain with Market Power
Posted: 27 Oct 2021
Date Written: October 26, 2021
We model a supply chain with a single risk-averse manufacturer who purchases from vendors and sells to consumers. We find that blockchain adoption always enhances manufacturer welfare in this setting when adoption costs are zero; as a consequence, the manufacturer always adopts blockchain for sufficiently small adoption costs. The enhanced manufacturer welfare from blockchain adoption arises for two reasons: the manufacturer possessing risk aversion and the blockchain reducing information asymmetry for consumers. With regard to the first effect, blockchain enables efficient tracing of defective products so that the manufacturer can selectively recall defective products rather than conducting a full recall. This tracing ability reduces the risk involved in the manufacturer purchasing from multiple vendors and consequently leads the manufacturer to endogenously diversify across vendors. Since the manufacturer is risk averse, that diversification reduces her sensitivity to recalls; in turn, the manufacturer endogenously expands her sales volume, generating higher expected profits and higher expected utility when she adopts blockchain. With regard to the second effect, blockchain stores details from the manufacturing process, thereby ameliorating information asymmetry for consumers. This information asymmetry reduction increases consumer surplus. The manufacturer optimally responds to that increased consumer surplus by raising the consumer price when she adopts blockchain. The consumer price increase generates both higher expected profits and higher expected utility.
Keywords: Blockchain, Blockchain Adoption, Supply Chain, Market Power
JEL Classification: G00, O30
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