Some two-echelon supply-chain games: Improving from deterministic- symmetric-information to stochastic-asymmetric-information models

Abstract

Many supply-chain and inventory models use the following two-echelon symmetric-information and deterministic gaming structure: a "manufacturer" wholesales a product to a "retailer," who in turn retails it to the consumer. The retail market demand varies with the retail price according to a deterministic "demand function" that is known to both the manufacturer and the retailer. It is then assumed that the "players" (the manufacturer and the retailer) arrive at their pricing and batch-size decisions through a Stackelberg game or a "fixed markup percentage" game. The first part of this paper reveals many implausible effects of demand-curve forms on the behavior of these gaming models. However, we do not merely conclude that two-echelon gaming results obtained via assuming one convenient demand-curve form can often become invalid under other demand-curve forms. More importantly, we argue in the second part of the paper that the various implausible effects revealed here suggest a different but more fundamental conclusion: the assumed non-cooperative games are themselves flawed, because "gaming" is meaningless and logically circular in a deterministic-and-symmetrical-information system. We then present an introductory illustration on how the introduction of stochasticity and information-asymmetry leads to more plausible two-echelon supply-chain gaming models. Together, the two parts demonstrate the necessity and practicality of using a stochastic-and-asymmetric-information instead of the prevalent deterministic-symmetric-information approach in many supply-chain models. © 2003 Elsevier B.V. All rights reserved.