Abstract: Based on a new definition of the bullwhip effect, i.e. a phenomenon where the position and the characteristics of demand curve change from a downstream firm to a upstream firm along a supply chain, this paper studies the economic mechanism of the bullwhip effect. The results show that the existence of the bullwhip effect and the features of the bullwhip effect depend on the downstream firm's forecasting technique, cost function and decision behavior. Finally, the practical implications are given by numerical examples.