QF vs. Buy-Back Contract in Buyer-Supplier Relationships

Abstract

In Chaps. 4 and 5, we are able to determine optimal relational contracts in the case where repeated transactions between supplier and buyer are governed by a supply chain contract. We distinguish QF and buy-back contracts and find out that the respective relational contracts only differ in the returns mechanisms. This observation raises the question which type of contract is better with respect to relational contracting. First, we characterize how much leeway for adaptation QF and buyback contracts grant to the supply chain parties and how the two contract types differ in this sense. Second, we analyze the implications of contract choice for the need for extra transfer payments in the course of business relationships. Finally, we illustrate by the help of numerical examples how the amount of supplementary transfer payments depends on the share of expected supply chain profit, realized demand, and market characteristics.

To elaborate differences between QF and buy-back contracts in the context of relational contracting, we have to make sure that the contracts we are comparing are in a sense equivalent. This is done in Sect. 6.1.1. Later on, in Sect. 6.1.2, we use the results to contrast the leeway for contract adaptation offered by (equivalent) QF and buy-back contracts.