Supply chain management in the presence of strategic consumers and consumption externalities

In this dissertation, I study the management of supply chains in which consumers' utilities from the product depend on the total consumption (consumption externalities) and all parties involved, consumers as well, maximize their own well-being (strategic consumers). I consider two practical motivations: vaccine for seasonal influenza (flu) epidemic and high-fashion luxury goods.;In Chapter 2, I study the impact of yield uncertainty (supply side) and self-interested consumers (demand side) on the inefficiency in the influenza vaccine supply chain. Previous economic studies, focusing on demand side, find that the equilibrium demand is always less than the socially optimal demand since self-interested individuals do not internalize the social benefit of protecting others via reduced infectiousness (positive externality). In contrast, I show that the equilibrium demand can be greater than the socially optimal demand after accounting for the limited supply due to yield uncertainty and manufacturer's incentives. The main driver for this result is a second (negative) externality: self-interested individuals ignore that vaccinating people with high infection costs is more beneficial for the society when supply is limited. I show that the extent of the negative externality can be reduced through more efficient and less uncertain allocation mechanisms. In order to investigate the relative effectiveness of government interventions on supply and demand sides under various demand and supply characteristics, I construct two partially centralized scenarios, where the social planner (government) intervenes either on the demand side or the supply side but not both, and conduct an xtensive numerical analysis.;In Chapter 3, I develop a mechanism which coordinates a supply chain with consumption externalities and a profit-maximizing manufacturer having uncertain production process in the presence of rational consumers. This mechanism includes tax/subsidy payments on the demand side (individual consumers) and a transfer payment on the supply side (manufacturer). I show that, under the mechanism, the manufacturer is ex ante better off; moreover, expected total utility of all individuals are higher. I also show that the mechanism allows arbitrary division of ex ante total social welfare between individuals and the manufacturer.;Chapter 4 develops an analytical model to study the impact of snobbish (exclusivity-seeking) consumer behavior on a firm's price and quantity decisions. I consider a profit-maximizing monopoly firm selling a product over two periods to two segments of consumers (with high and low valuation of the product), who are forward-looking and snobbish, i.e., their valuation of the product decreases as more people in the population consume it. This modeling framework enables me to explain the heterogeneity in pricing of snob appeal products observed in practice. Specifically, I find that markdown pricing is optimal when the fraction of high-value consumers is small whereas uniform pricing is optimal when this fraction is large. Thus, snobbish consumer behavior provides another motivation for markdown pricing. When selling to snobbish consumers, inter-temporal price discrimination increases product exclusivity and hence consumers' willingness to pay, in addition to the usual effect of attracting consumers with different valuations. Similar to normal products, I find that advance purchase discounts are optimal only when consumers do not know their true valuations in the first period. However, I show that snobbish consumer behavior coupled with uncertain valuations may lead to discounts in advance. I use this modeling framework to formally distinguish between scarcity and exclusivity, where the former is defined with respect to the demand whereas the latter is defined with respect to the entire population. I find that snobbish consumer behavior leads to scarcity, but not necessarily to exclusivity, i.e., the product may be exclusive even when consumers are not snobbish. Finally, contrary to intuition, I find that the product may become more exclusive when the price is marked down and hence price markdowns need not always be associated with excess inventory when selling to snobbish consumers.