Pricing and lead time decisions in decentralized supply chains
Institute for Operations Research and the Management Sciences (I N F O R M S)
decentralized supply chains, price- and lead-time-sensitive demand, customer utility, promised delivery lead time, Stackelberg game, decision inefficiency, operational and market factors, pricing, double marginalization
This paper studies a decentralized supply chain consisting of a supplier and a retailer facing price- and lead-time-sensitive demands. A Stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower. The equilibrium strategies of the two players are obtained. Using the performance of the corresponding centralized system as a benchmark, we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginalization effect. However, further analysis shows that the decision inefficiency is strongly influenced by market and operational factors, and if the operational factors are dominating, it may not be significant. This shows that before pursuing a coordination strategy with retailers, a supplier should first improve his or her own internal operations.
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Liu, L., Parlar, M., & Zhu, S. (2007). Pricing and lead time decisions in decentralized supply chains. Management Science, 53(5), 713-725. doi: 10.1287/mnsc.1060.0653