Truth, trust, and trade-offs: When blockchain in supply chains backfires

We study the role of blockchain in achieving information transparency and generating trust in a dyadic supply chain with one retailer sourcing from a single supplier. The retailer has superior information regarding the demand distribution, whereas the supplier sets the capacity in preparation for the selling season. Two sources of risk are identified: information risk, which captures the incentives of the retailer to portray a favorable market condition to the supplier to encourage the supplier to secure an ample capacity, and demand risk, which captures the potential for lost sales or excess capacity investment, even when knowing the correct demand distribution. We demonstrate how blockchain eliminates information risk for the supplier. As an alternative to blockchain, we analyze a commitment contract where the retailer can order in advance a certain number of units; this commitment can serve as a signaling tool to convey market information to the supplier. We argue that the commitment contract can eliminate the information risk for the supplier (as can blockchain), but it can also reduce the supplier’s demand risk. We conclude that in many instances, the supplier and the supply chain can become worse off when blockchain is used, while the retailer favors this technology.