Supply Chain Dynamics: How Risk and Bargaining Shape Cost Pass-through

Abstract This study employs a game-theoretic approach to examine cost pass-through in a supply chain involving a manufacturer and a retailer, factoring in yield uncertainty and bargaining power. We analyze how manufacturer cost changes affect wholesale and retail prices, focusing on supply-side risks and negotiation dynamics. The base model reveals three key insights: (1) yield uncertainty lowers the cost pass-through rate, stabilizing downstream prices; (2) higher mean yield enhances pass-through, reflecting cost shifts more fully; and (3) increased manufacturer bargaining power reduces pass-through, keeping costs upstream. An extended model introduces retailer effort to boost demand, uncovering additional dynamics: low effort costs can lead to negative pass-through, where retail prices drop despite cost rises, while higher effort costs shift pass-through toward positive values. These findings underscore the complex interplay of uncertainty, bargaining, and strategic effort in shaping pricing outcomes. We offer managerial insights for navigating cost volatility and suggest future research directions, such as dynamic models and empirical validation. JEL classification: L11, M11, M21. Keywords: Supply chain risk, Cost pass-through, Stackelberg game, Bargaining power.