DOI: 10.4018/IJISSCM.289225 International Journal of Information Systems and Supply Chain Management Volume 15 • Issue 1 This article published as an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and production in any medium, provided the author of the original work and original publication source are properly credited. *Corresponding Author 1 Impact of Price-Sensitive Demand and Premium Payment Scheme on Bullwhip Efect Mona Verma, Shaheed Sukhdev College of Business Studies, University of Delhi, India Reena Jain, Department of Operational Research, University of Delhi, India Chandra K. Jaggi, Department of Operational Research, University of Delhi, India https://orcid.org/0000-0001-6179-8376 ABSTRACT Bullwhip effect reduces the efficiency, responsiveness, and value of the supply chain. There are some indirect causes like lead time, the number of echelons, and some direct causes of bullwhip effect such as rationing or price variation. Due to capacity constraints, retailers are forced to experience rationing of their demands. Fear of rationing usually gives rise to manipulable demand and hence increases the bullwhip effect. Moreover, if the retailer’s demand is price sensitive, it will cause price variation. The offerings of premium payment by retailers due to unfulfilled demand lure the supplier to extend his existing capacity and to allocate them more supply. In this paper, an attempt has been made to mitigate the impact of the bullwhip effect using a premium payment scheme. A technique has been coined that will help in reducing the bullwhip effect. The increased value of the supply chain on using a premium payment scheme is proof of the reduction of the bullwhip effect. Results are validated through numerical analysis. KEywoRDS Bullwhip Effect, Capacity Constraint, Premium Payment Scheme, Price Variation, Price-Sensitive Demand, Rationing INTRoDUCTIoN A supply chain system includes all the communications among suppliers, manufacturers, retailers and customers. The amalgamation of information in the form of demand and supply at manufacturing sites in the context of the supply chain has become more practical and has attracted the attention of both industry practitioners and academic researchers. This information needs to be propagated correctly to an upstream member from downstream members. Distortion in this information or amplification of demand on traversing the information in the form of orders from lower echelon to higher echelon is termed as the “bullwhip effect”. Lee et al. (1997a) discussed the direct causes of bullwhip effect under four categories viz. demand signal processing, order batching, price variation and rationing. However, some indirect causes also exist such as lead time, the number of echelons in the supply chain (Agrawal, et. al, 2009, Chatfield et al. 2004). Whenever there is a capacity constraint, the rationing of resources arises, which builds a bullwhip effect. To lure the supplier, the retailers offer premium payment for the unfulfilled demand so that