Scan Based Trading and Bargaining Equilibrium: A Structural Estimation of Channel Surplus

Problem Definition: Scan Based Trading (SBT) represents a type of replenishment system in which the supplier retains title until the product is scanned through checkout at the retail store by the consumer. Although SBT carries potential benefits for both parties in the supplier-retailer dyad, it may also yield asymmetric gains to these parties, particularly because SBT can impose upon suppliers greater inventory costs through shrink. We document the financial benefits in terms of channel surplus creation and allocation among parties in a vertical channel under SBT vis-a-vis the more traditional vendor-managed inventory (VMI) contracts. Academic/Practical Relevance: Although prior literature has examined inventory benefits and drawbacks from VMI and SBT contracts in retailer-supplier dyads, it has failed to offer a systematic evaluation of the relative impact of these contract forms on bargaining power and surplus in these dyads. We address this knowledge gap. Methodology: To that end, we use a methodological approach that incorporates an empirical Nash-in-Nash bargaining model, a supplementary regression, and a counterfactual simulation. Results: We find that retailer bargaining power is higher under SBT relative to VMI contracts. Moreover, the direct effects of a retailer switching from VMI to SBT regimes generate an average increase of 27% in total channel surplus, allowing the retailer and its supplier to increase their surplus by 19% and 32%, respectively. However, while the retailer’s surplus share decreases by approximately 6%, the Supplier’s increases by about 4%. We attribute the decrease in the retailer’s share to a stronger bargaining position on the supplier side based on higher supplier shrink costs. Managerial Implications: Our findings provide managers with more transparent information regarding the set of outcomes they can expect should they choose to enter into SBT contracts. This is important because we show how an outcome that has significantly hindered the adoption of SBT contracts, i.e., shrink costs, can enter into the negotiation between retailers and suppliers to optimally split the dyadic surplus of the contracts between these parties.