Coalition or decentralization: a game-theoretic analysis of a three-echelon supply chain network

Abstract

Supply chains have become the major and dominant paradigm of business and competition. The main challenge is how to act in multi-echelon supply chains considering the levels involved. Making a choice independently or integrating with some or all levels will be a critical decision, and therefore affects the overall profit of the chain. This article proposes a non-cooperative game theory approach to helping in making a better decision in the supply chain and gaining the most accessible benefit. Our research considers unlimited three-echelon supply chains with S suppliers, M manufacturers and K retailers. The Nash equilibrium and definition are used bearing in mind inventory and pricing and marketing cost as decision variables for this matter. This paper studies a three-echelon supply chain network and focuses on the value of integrating a pair of partners in the chain. In the decentralized case, the supplier sets its own price, the manufacturer points out order quantity, wholesale price and backorder quantity, and the retailer charges the final retail price of the product and marketing product. Though there are multiple players at a single echelon level, each manufacturer supplies only a specific product to a given retailer. In addition to the decentralized case, two integration scenarios have been taken into account: manufacturer-retailer and supplier-manufacturer. As for manufacturer-retailer integration, inventory/holding cost issues diminish to a single warehouse and the retailer does not have to enforce marketing effort any more. Supplier-manufacturer integration brings similar benefits. Under each scenario, all parties involved simultaneously set their strategies. Through a numerical experiment, 17 design cases (through designing experiments) have been developed and the total profit of the supply chain under each scenario has been evaluated. Statistical tests on the above introduced 17 experiments have found that the decentralized system performs significantly worse than the integration of the supplier with the manufacturer, whereas no significant difference can be observed regarding other combinations.

Keywords:

• supply chain
• coalition
• non-cooperative games
• Nash equilibrium
• design of experiment
• Levenberg-Marquardt algorithm

JEL Classification:

• C72

Additional information

Notes on contributors

Hannan Amoozad Mahdiraji

Hannan AMOOZAD MAHDIRAJI. PhD in operation and manufacturing management from the University of Teheran, BA in industrial engineering. Assistant Professor of Kashan branch, Islamic Azad University and the Chief of Planning and Systems Department of Iran Mercantile Exchange. Has published nearly 15 papers on supply chains and MCDM models in international journals and conferences.

Kannan Govindan

Kannan GOVINDAN is currently an Associate Professor of operations and supply chain management at the Department of Business and Economics, University of Southern Denmark, Odense M, Denmark. Has published more than 65 papers in the refereed international journals and more than 70 papers in conferences. Was awarded a gold medal for the best PhD thesis. Research interests: logistics, supply chain management, green and sustainable supply chain management, reverse logistics and maritime logistics.

Edmundas Kazimieras Zavadskas

Edmundas Kazimieras ZAVADSKAS. PhD, DSc, h.c.multi. Prof., the Head of the Department of Construction Technology and Management at Vilnius Gediminas Technical University, Lithuania. Senior Research Fellow at the Research Institute of Smart Building Technologies. PhD in Building Structures (1973). Dr Sc in Building Technology and Management (1987). A member of Lithuanian and several foreign Academies of Sciences. Doctore Honoris Causa from Poznan, Saint Petersburg and Kiev universities. Honorary International Chair Professor of the National Taipei University of Technology. A member of international organizations; a member of steering and programme committees at many international conferences; a member of the editorial boards of several research journals; the author and co-author of more than 400 papers and a number of monographs in Lithuanian, English, German and Russian. The editor-in-chief of journals Technological and Economic Development of Economy and Journal of Civil Engineering and Management. Research interests: building technology and management, decision-making theory, automation in design and decision support systems.

Seyed Hossein Razavi Hajiagha

Seyed Hossein RAZAVI HAJIAGHA. Assistant Professor at the Department of Systemic and Productivity Studies, Institute for Trade Studies and Research, Teheran, Iran. PhD in Production and Operation Management (2012). The author and co-author of about 20 scientific papers. Research interests: multiple criteria analysis, decision-making theories, data envelopment analysis and mathematical modelling of industrial problems.