Question

Suppose a company’s product might either be produced unsustainably with marginal costs of ?? = 1 (with probability 50%) or sustainably with ?? = 4, and that if the company is transparent about its production process, it has to install a block chain technology which costs ?? ∗ ? where ? equals 6 if the company is unsustainable and 1/2 if it not. The market for the product is perfectly competitive such that ? = ?[??] where ? is the price.

a) Under full information, what will be the price for the company offering unsustainable products?

b) Showtheincentivecompatibilityconstraints(IC)that must be satisfied in a separating equilibrium under incomplete information.

Answer 1

To better understand this opportunity, we studied seven major U.S. corporations that are leaders in supply chain management and are trying to figure out how blockchain can help solve the challenges they face. These companies—Corning, Emerson, Hayward, IBM, Mastercard, and two others that wish to remain anonymous—operate in varied industries: manufacturing, retailing, technology, and financial services. Some of them are just beginning to explore blockchain, a few are conducting pilots, and others have moved even further and are working with supply chain partners to develop applications. This article describes what we’ve learned about the state of play, the advantages that blockchain can provide, and how the use of blockchain in supply chains will differ from its use in cryptocurrencies.

A blockchain is a distributed, or decentralized, ledger—a digital system for recording transactions among multiple parties in a verifiable, tamperproof way. The ledger itself can also be programmed to trigger transactions automatically. For cryptocurrency networks that are designed to replace fiat currencies, the main function of blockchain is to enable an unlimited number of anonymous parties to transact privately and securely with one another without a central intermediary. For supply chains, it is to allow a limited number of known parties to protect their business operations against malicious actors while supporting better performance. Successful blockchain applications for supply chains will require new permissioned blockchains, new standards for representing transactions on a block, and new rules to govern the system—which are all in various stages of being developed.

We evaluated and stress tested the impact and feasibility of each of these use cases to understand better blockchain’s overall strategic value and how to capture it.

Our analysis suggests the following three key insights on the strategic value of blockchain:

1. Blockchain does not have to be a disintermediator to generate value, a fact that encourages permissioned commercial applications.
2. Blockchain’s short-term value will be predominantly in reducing cost before creating transformative business models.
3. Blockchain is still three to five years away from feasibility at scale, primarily because of the difficulty of resolving the “coopetition” paradox to establish common standards.