Quality and Welfare Implications of Product Traceability in Supply Chain

Motivated by the recent trend of increasing transparency and traceability in the food and pharmaceutical industries, we investigate the impacts of traceability on a supply chain in which a buyer (e.g., a procurement agent or retailer) sources a product from multiple competing suppliers. When a product fails in the field, penalty cost including cost of recalls and consumers' ill-will is incurred.We examine the implications of various mechanisms for sharing the penalty cost among supply chain members. With traceability technology, the defective components are traced back to the providers and therefore the corresponding penalty is imposed; otherwise, providers' accountability cannot be identified and therefore the penalty cost must be shared among all suppliers based on group sharing mechanisms. Each supplier can exert a costly effort to improve its product's quality, and a higher quality leads to a lower failure rate and therefore a lower penalty cost. Another benefit of a higher quality is to gain a larger market share in the competing market. In a multi-agent game-theoretic setting, we characterize the equilibrium outcomes for this quality competition game, and reveal the impacts of traceability on product quality and welfare of supply chain members under various scenarios based on the buyer's monopolistic power.We show that traceability may either hurt or improve product quality depending on the magnitude of product profitability, the cost of quality improvement, the buyer's monopolistic power in decision making, and the cost of adopting traceability. We also compare the decentralized supply chain with its centralized counterpart, and identify conditions that lead to supply chain coordination