This paper constructs a model of a supply chain to examine how demand volatility is passed upstream through the chain. In particular, we seek to determine how likely it is that the chain experiences a bullwhip effect, where the variance of the upstream firms’ production exceeds the variance of...

The paper shows that taking inventory control out of the hands of competitive of exclusive retailers and assigning it to a manufacturer increases the value of a supply chain especially for goods whose demand is highly volatile. This is because doing so solves incentive distortions that arise...