The transaction contract of scarce materials in a supply chain: Paying a higher price to acquire a higher quantity

Abstract When a firm agrees to pay a higher price to a key parts supplier in order to guarantee availability when an unexpected supply chain disruption or a strong demand in a retail market causes a scarcity of a needed material, both the purchase price and the acquired quantity behave in a positive relationship, which is an uncommon but important characteristic in the design of supply chain transaction contracts. This article investigates the design of transaction contracts in the supply chain of a manufacturer and a supplier, where the supplier (upstream firm) determines the form of positive relationship of scarce materials between the unit purchase price and the acquired quantity and the manufacturer (downstream firm) chooses the acquired quantity of materials after knowing the contract terms. We investigate two various charging schemes: uniform and block charging schemes. We show that despite the implementation of the block charging scheme, which seems unfavourable to the supplier since the supplier charges less at a low level of acquired quantities, the contract may return the same profits to the supplier as the uniform charging scheme, which seems favourable to the supplier since the supplier can charge a high transacted price for all quantities.