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Article: A stochastic and asymmetric-information framework for a dominant-manufacturer supply chain

TitleA stochastic and asymmetric-information framework for a dominant-manufacturer supply chain
Authors
KeywordsInformation asymmetry
Stackelberg game
Supply chain
Issue Date2007
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejor
Citation
European Journal Of Operational Research, 2007, v. 176 n. 1, p. 295-316 How to Cite?
AbstractConsider a dominant manufacturer wholesaling a product to a retailer, who in turn retails it to the consumers at $p/unit. The retail-market demand volume varies with p according to a given demand curve. This basic system is commonly modeled as a manufacturer-Stackelberg ([mS]) game under a "deterministic and symmetric-information" ("det-sym-i") framework. We first explain the logical flaws of this framework, which are (i) the dominant manufacturer-leader will have a lower profit than the retailer under an iso-elastic demand curve; (ii) in some situations the system's "correct solution" can be hyper-sensitive to minute changes in the demand curve; (iii) applying volume discounting while keeping the original [mS] profit-maximizing objective leads to an implausible degenerate solution in which the manufacturer has dictatorial power over the channel. We then present an extension of the "stochastic and asymmetric-information" ("sto-asy-i") framework proposed in Lau and Lau [Lau, A., Lau, H.-S., 2005. Some two-echelon supply-chain games: Improving from deterministic-symmetric-information to stochastic-asymmetric-information models. European Journal of Operational Research 161 (1), 203-223], coupled with the notion that a profit-maximizing dominant manufacturer may implement not only [mS] but also "[pm]"-i.e., using a manufacturer-imposed maximum retail price. We show that this new framework resolves all the logical flaws stated above. Along the way, we also present a procedure for the dominant manufacturer to design a profit-maximizing volume-discount scheme using stochastic and asymmetric demand information. Using our sto-asy-i framework to resolve the logical flaws of the det-sym-i framework also reveals two noteworthy points: (i) the attractiveness of the perfectly legal but overlooked channel-coordination mechanism [pm]; and (ii) volume discounting as a means for the dominant manufacturer to benefit from information known only to the retailer. © 2005 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/86067
ISSN
2015 Impact Factor: 2.679
2015 SCImago Journal Rankings: 2.595
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorLau, AHLen_HK
dc.contributor.authorLau, HSen_HK
dc.contributor.authorZhou, YWen_HK
dc.date.accessioned2010-09-06T09:12:25Z-
dc.date.available2010-09-06T09:12:25Z-
dc.date.issued2007en_HK
dc.identifier.citationEuropean Journal Of Operational Research, 2007, v. 176 n. 1, p. 295-316en_HK
dc.identifier.issn0377-2217en_HK
dc.identifier.urihttp://hdl.handle.net/10722/86067-
dc.description.abstractConsider a dominant manufacturer wholesaling a product to a retailer, who in turn retails it to the consumers at $p/unit. The retail-market demand volume varies with p according to a given demand curve. This basic system is commonly modeled as a manufacturer-Stackelberg ([mS]) game under a "deterministic and symmetric-information" ("det-sym-i") framework. We first explain the logical flaws of this framework, which are (i) the dominant manufacturer-leader will have a lower profit than the retailer under an iso-elastic demand curve; (ii) in some situations the system's "correct solution" can be hyper-sensitive to minute changes in the demand curve; (iii) applying volume discounting while keeping the original [mS] profit-maximizing objective leads to an implausible degenerate solution in which the manufacturer has dictatorial power over the channel. We then present an extension of the "stochastic and asymmetric-information" ("sto-asy-i") framework proposed in Lau and Lau [Lau, A., Lau, H.-S., 2005. Some two-echelon supply-chain games: Improving from deterministic-symmetric-information to stochastic-asymmetric-information models. European Journal of Operational Research 161 (1), 203-223], coupled with the notion that a profit-maximizing dominant manufacturer may implement not only [mS] but also "[pm]"-i.e., using a manufacturer-imposed maximum retail price. We show that this new framework resolves all the logical flaws stated above. Along the way, we also present a procedure for the dominant manufacturer to design a profit-maximizing volume-discount scheme using stochastic and asymmetric demand information. Using our sto-asy-i framework to resolve the logical flaws of the det-sym-i framework also reveals two noteworthy points: (i) the attractiveness of the perfectly legal but overlooked channel-coordination mechanism [pm]; and (ii) volume discounting as a means for the dominant manufacturer to benefit from information known only to the retailer. © 2005 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/ejoren_HK
dc.relation.ispartofEuropean Journal of Operational Researchen_HK
dc.rightsEuropean Journal of Operational Research. Copyright © Elsevier BV.en_HK
dc.subjectInformation asymmetryen_HK
dc.subjectStackelberg gameen_HK
dc.subjectSupply chainen_HK
dc.titleA stochastic and asymmetric-information framework for a dominant-manufacturer supply chainen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0377-2217&volume=176&spage=295&epage=316&date=2007&atitle=A+stochastic+and+asymmetric-information+framework+for+a+dominant-manufacturer+supply+chainen_HK
dc.identifier.emailLau, AHL: ahlau@business.hku.hken_HK
dc.identifier.authorityLau, AHL=rp01072en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.ejor.2005.06.054en_HK
dc.identifier.scopuseid_2-s2.0-33748957505en_HK
dc.identifier.hkuros137935en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-33748957505&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume176en_HK
dc.identifier.issue1en_HK
dc.identifier.spage295en_HK
dc.identifier.epage316en_HK
dc.identifier.eissn1872-6860-
dc.identifier.isiWOS:000241709600021-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridLau, AHL=7202626080en_HK
dc.identifier.scopusauthoridLau, HS=36942855500en_HK
dc.identifier.scopusauthoridZhou, YW=7405366443en_HK
dc.identifier.citeulike8653573-

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