Permissioned Blockchain Adoption in Supply Chains

de Wenjun Wang

We aim to identify factors that are critical in determining whether or not blockchain adoption arises in various market structures, and give guidance for addressing the challenges of blockchain implementation. In Chapter 2, we construct an economic framework for understanding the incentives of the firms in a supply chain to form a blockchain consortium. We find that blockchain reduces information asymmetry for consumers, thereby enhancing consumer welfare. Consumer welfare gains can be sufficiently large that blockchain adoption is socially beneficial; nonetheless, we find that blockchain adoption does not arise in equilibrium. This situation arises because blockchain adoption costs are borne by manufacturers, and manufacturers cannot extract consumer gains through prices due to the competitive nature of the manufacturing sector. We offer a system of transfers to generate blockchain adoption in equilibrium when it is socially beneficial. In Chapter 3, we investigate a variation of the model described in Chapter 2. Our analysis incorporates the blockchain’s ability to trace shipments and generate cost savings for the manufacturers who join the blockchain. Although the blockchain enables early recalls of defective goods with higher probability, and thus, reduces expected unit costs for all the manufacturers on the blockchain, such gains are still competed away and blockchain adoption does not arise in equilibrium. This result strengthens our earlier findings on the incentive misalignment in a perfectly competitive setting. The associated welfare implications of this model are similar to those in Chapter 2. In Chapter 4, we study a setting in which the consumer prices are determined exogenously. With this setting of sticky price, there exists a certain level of competition but it is not perfect. As a result, the manufacturer gains from blockchain adoption may be strictly positive, in contrast to two results in Chapters 2 and 3 where the gains are always competed away. We find that blockchain unequivocally benefits consumers but has an ambiguous effect upon the welfare of manufacturers. There exist conditions under which, although the blockchain improves global welfare, blockchain adoption does not arise in equilibrium. We refer to such a scenario as an adoption failure, and again a system of transfers is proposed to resolve that failure. In Chapter 5, we examine whether blockchain adoption arises in equilibrium for a supply chain in which a single risk-averse manufacturer sells directly to consumers; thus, the manufacturer possesses market power. In this setting, we find that blockchain adoption always enhances manufacturer welfare when the adoption cost is zero. While two results in Chapters 2 and 3 demonstrate that blockchain adoption does not arise when the manufacturing sector is perfectly competitive, our findings clarify that the failure of blockchain adoption is not generic across all market structures. Rather, blockchain adoption arises in equilibrium for supply chains when the manufacturer possesses market power and when the adoption cost is sufficiently small.