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Zbl 1137.90351
Lau, Amy Hing Ling; Lau, Hon-Shiang; Zhou, Yong-Wu
A stochastic and asymmetric-information framework for a dominant-manufacturer supply chain.
(English)
[J] Eur. J. Oper. Res. 176, No. 1, 295-316 (2007). ISSN 0377-2217

Summary: Consider 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 by {\it A. Lau} and {\it H.-S. Lau} [Eur. J. Oper. Res. 161, No. 1, 203--223 (2005; Zbl 1067.90117)], 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.
MSC 2000:
*90B10 Flows in networks
90B05 Inventory management

Keywords: supply chain; Stackelberg game; information asymmetry

Citations: Zbl 1067.90117

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