This paper develops a contracting model in which a supplier and a buyer have an opportunity to enter a long-term supply relationship. The buyer knows whether the market for his new product is either large or small, but the supplier can only make an assessment of the probabilities. We derive and characterize the optimal contractual forms from the supplier’s perspective. The optimal offering of the supplier (to the buyer) is one of the following three forms: (1) a customized menu (which depends on the supplier’s probability assessment) that will always lead to a signed contract (by the buyer regardless of his market size), (2) a boilerplate contract (which is independent of the assessment) that will be signed only if the buyer’s market is large, or (3) a boilerplate menu that will always lead to a signed contract. The optimal contractual form helps explain the practice of setup (or non-recurring engineering) charge, minimum order quantity (with a buyback option), and boilerplate contracts. The menus enable the buyer to signal his market size to the supplier in a credible way and induce the supplier to build the corresponding capacity.
-
Faculty
- Academic Areas
- Awards & Honors
- Seminars
-
Conferences
- Accounting Summer Camp
- California Econometrics Conference
- California Quantitative Marketing PhD Conference
- California School Conference
- China India Insights Conference
- Homo economicus, Evolving
-
Initiative on Business and Environmental Sustainability
- Political Economics (2023–24)
- Scaling Geologic Storage of CO2 (2023–24)
- A Resilient Pacific: Building Connections, Envisioning Solutions
- Adaptation and Innovation
- Changing Climate
- Civil Society
- Climate Impact Summit
- Climate Science
- Corporate Carbon Disclosures
- Earth’s Seafloor
- Environmental Justice
- Finance
- Marketing
- Operations and Information Technology
- Organizations
- Sustainability Reporting and Control
- Taking the Pulse of the Planet
- Urban Infrastructure
- Watershed Restoration
- Junior Faculty Workshop on Financial Regulation and Banking
- Ken Singleton Celebration
- Marketing Camp
- Quantitative Marketing PhD Alumni Conference
- Rising Scholars Conference
- Theory and Inference in Accounting Research
- Voices
- Publications
- Books
- Working Papers
- Case Studies
- Postdoctoral Scholars
-
Research Labs & Initiatives
- Cities, Housing & Society Lab
- Corporate Governance Research Initiative
- Corporations and Society Initiative
- Golub Capital Social Impact Lab
- Policy and Innovation Initiative
- Rapid Decarbonization Initiative
- Stanford Latino Entrepreneurship Initiative
- Value Chain Innovation Initiative
- Venture Capital Initiative
- Behavioral Lab
- Data, Analytics & Research Computing