Side-payment contracts in two-person nonzero-sum supply chain games: Review, discussion and applications

This paper investigates supply chain coordination with side-payment contracts. We first summarize specific side-payment contracts and present our review on the literature that developed general side-payment schemes to coordinate supply chains. Following our review, we discuss two criteria that a proper side-payment contract must satisfy, and accordingly introduce a decision-dependent transfer payment function and a constant transfer term. We present the condition that the transfer function must satisfy, and use Nash arbitration scheme and Shapley value to compute the constant transfer term and derive its closed-form solution. Next, we provide a five-step procedure for the development of side-payment contract, and apply it to four supply chain games: Cournot and Bertrand games, a two-retailer supply chain game with substitutable products and a one-supplier, one-retailer supply chain. More specifically, for the Cournot game, we construct a linear transfer function and a constant side-payment to coordinate two producers. For the Bertrand game, we build a nonlinear transfer function which is equivalent to a revenue-sharing contract, and show that the constant term is zero and two firms in the game equally share the system-wide profit. For a supply chain with substitutable products, we present a side-payment contract to coordinate two retailers. For a two-echelon supply chain, we develop a proper side-payment scheme that can coordinate the supply chain and also help reduce the impact of forward buying on supply chain performance.

[1]  Z. K. Weng,et al.  Channel coordination and quantity discounts , 1995 .

[2]  Terry L. Esper,et al.  Supply Chain Management Strategy , 2010 .

[3]  Stephen G. Powell,et al.  Manufacturer incentives to improve retail service levels , 1998 .

[4]  J. Neumann,et al.  The Theory of Games and Economic Behaviour , 1944 .

[5]  David Simchi-Levi,et al.  Handbook of Quantitative Supply Chain Analysis: Modeling in the E-Business Era (International Series in Operations Research & Management Science) , 2004 .

[6]  Paul A. Rubin,et al.  Joint Optimality in Buyer‐Supplier Negotiations , 1990 .

[7]  Michael H. Riordan,et al.  Uncertainty, Asymmetric Information and Bilateral Contracts , 1984 .

[8]  A. Tsay Managing retail channel overstock: markdown money and return policies , 2001 .

[9]  Evan L. Porteus,et al.  Selling to the Newsvendor: An Analysis of Price-Only Contracts , 2001, Manuf. Serv. Oper. Manag..

[10]  Yunzeng Wang,et al.  Revenue‐Sharing vs. Wholesale‐Price Contracts in Assembly Systems with Random Demand , 2004 .

[11]  Ravi Anupindi,et al.  Centralization of Stocks: Retailers Vs. Manufacturer , 1999 .

[12]  Daniel Granot,et al.  On the effectiveness of returns policies in the price‐dependent newsvendor model , 2005 .

[13]  Taner Bilgiç,et al.  Analysis of a two-stage telecommunication supply chain with technology dependent demand , 2007, Eur. J. Oper. Res..

[14]  T. Bresnahan,et al.  Dealer and manufacturer margins , 1985 .

[15]  Fernando Bernstein,et al.  Coordinating Supply Chains with Simple Pricing Schemes: The Role of Vendor-Managed Inventories , 2006, Manag. Sci..

[16]  Douglas J. Thomas,et al.  Coordinated supply chain management , 1996 .

[17]  Lazaros G. Papageorgiou,et al.  Fair transfer price and inventory holding policies in two-enterprise supply chains , 2002, Eur. J. Oper. Res..

[18]  A. Tsay The Quantity Flexibility Contract and Supplier-Customer Incentives , 1999 .

[19]  S. Graves,et al.  Supply chain management : design, coordination and operation , 2003 .

[20]  Gérard P. Cachon Supply Chain Coordination with Contracts , 2003, Supply Chain Management.

[21]  B. Tan,et al.  Modelling and analysis of a network organization for cooperation of manufacturers on production capacity , 2006 .

[22]  Fernando Bernstein,et al.  Decentralized Supply Chains with Competing Retailers Under Demand Uncertainty , 2005, Manag. Sci..

[23]  Gerhard Jäger,et al.  Game Theory and Pragmatics , 2005 .

[24]  Gérard P. Cachon,et al.  Game Theory in Supply Chain Analysis , 2004 .

[25]  Ananth V. Iyer,et al.  Backup agreements in fashion buying—the value of upstream flexibility , 1997 .

[26]  Jean Lemaire,et al.  Cooperative Game Theory and its Insurance Applications , 1991, ASTIN Bulletin.

[27]  Gérard P. Cachon,et al.  Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain , 2001, Manag. Sci..

[28]  Mahmut Parlar,et al.  Allocation of Cost Savings in a Three-Level Supply Chain with Demand Information Sharing: A Cooperative-Game Approach , 2009, Oper. Res..

[29]  William S. Lovejoy,et al.  Quantity Flexibility Contracts and Supply Chain Performance , 1999, Manuf. Serv. Oper. Manag..

[30]  Lode Li Information Sharing in a Supply Chain with Horizontal Competition , 2002, Manag. Sci..

[31]  Esther Gal-Or,et al.  Duopolistic vertical restraints , 1991 .

[32]  Christopher S. Tang,et al.  Designing Supply Contracts: Contract Type and Information Asymmetry , 2004, Manag. Sci..

[33]  S. Chopra,et al.  Supply Chain Management: Strategy, Planning & Operation , 2007 .

[34]  Z. K. Weng,et al.  Pricing and ordering strategies in manufacturing and distribution alliances , 1997 .

[35]  D. Lambert,et al.  SUPPLY CHAIN MANAGEMENT -- MORE THAN A NEW NAME FOR LOGISTICS , 1997 .

[36]  Gérard P. Cachon,et al.  Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations , 2005, Manag. Sci..

[37]  Sridhar Seshadri,et al.  Policy mechanisms for supply chain coordination , 2000, IIE Transactions.

[38]  Roman Kapuscinski,et al.  Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort , 2004, Manag. Sci..

[39]  Xiaotong Li Cheap Talk and Bogus Network Externalities in the Emerging Technology Market , 2005 .

[40]  P. Pontrandolfo,et al.  Supply chain coordination by revenue sharing contracts , 2004 .

[41]  Maqbool Dada,et al.  Pricing and the Newsvendor Problem: A Review with Extensions , 1999, Oper. Res..

[42]  J. Neumann,et al.  Theory of games and economic behavior , 1945, 100 Years of Math Milestones.

[43]  S. Plattner,et al.  Economic decision making in a public marketplace , 1982 .

[44]  Z. Kevin Weng,et al.  Coordinated ordering decisions for short life cycle products with uncertainty in delivery time and demand , 2003, Eur. J. Oper. Res..

[45]  Terry A. Taylor,et al.  Supply Chain Coordination Under Channel Rebates with Sales Effort Effects , 2002, Manag. Sci..

[46]  J. Nash Equilibrium Points in N-Person Games. , 1950, Proceedings of the National Academy of Sciences of the United States of America.

[47]  Barry Alan Pasternack,et al.  Optimal Pricing and Return Policies for Perishable Commodities , 2008, Mark. Sci..

[48]  L. S. Shapley,et al.  17. A Value for n-Person Games , 1953 .

[49]  M. Parlar,et al.  Game Theoretic Applications in Supply Chain Management: A Review , 2005 .

[50]  J. Nash THE BARGAINING PROBLEM , 1950, Classics in Game Theory.

[51]  D. Schmeidler The Nucleolus of a Characteristic Function Game , 1969 .

[52]  Albert Y. Ha Supplier‐buyer contracting: Asymmetric cost information and cutoff level policy for buyer participation , 2001 .

[53]  Srinivasan Raghunathan,et al.  Impact of demand correlation on the value of and incentives for information sharing in a supply chain , 2003, Eur. J. Oper. Res..

[54]  Gilvan C. Souza,et al.  Supply Chain Coordination for False Failure Returns , 2006, Manuf. Serv. Oper. Manag..

[55]  A. Cournot Researches into the Mathematical Principles of the Theory of Wealth , 1898, Forerunners of Realizable Values Accounting in Financial Reporting.

[56]  Lawrence M. Wein,et al.  Analysis of a Decentralized Production-Inventory System , 2003, Manuf. Serv. Oper. Manag..

[57]  M. Parlar Game theoretic analysis of the substitutable product inventory problem with random demands , 1988 .

[58]  A. Banerjee A JOINT ECONOMIC-LOT-SIZE MODEL FOR PURCHASER AND VENDOR , 1986 .

[59]  Philip Wolfe,et al.  Contributions to the theory of games , 1953 .

[60]  Xiaohang Yue,et al.  Production , Manufacturing and Logistics Demand forecast sharing in a dual-channel supply chain , 2006 .

[61]  Kusum L. Ailawadi,et al.  Trade Promotion: Essential to Selling through Resellers , 1999 .

[62]  R. Gibbons Game theory for applied economists , 1992 .

[63]  J. R. Carter,et al.  THE IMPACT OF TRANSPORTATION COSTS ON SUPPLY CHAIN MANAGEMENT. IN: TRANSPORT LOGISTICS , 2002 .

[64]  Eric Sucky,et al.  Production , Manufacturing and Logistics A bargaining model with asymmetric information for a single supplier – single buyer problem , 2005 .

[65]  Wenjiao Zhao,et al.  Coordination of joint pricing-production decisions in a supply chain , 2002 .

[66]  Hau L. Lee,et al.  Decentralized Multi-Echelon Supply Chains: Incentives and Information , 1999 .

[67]  K. Donohue Efficient Supply Contracts for Fashion Goods with Forecast Updating and Two Production Modes , 2000 .

[68]  Zuo-Jun Max Shen,et al.  Channel Performance Under Consignment Contract with Revenue Sharing , 2004, Manag. Sci..

[69]  Paul H. Zipkin,et al.  Competitive and Cooperative Inventory Policies in a Two-Stage Supply Chain , 1999 .

[70]  Evan L. Porteus Responsibility Tokens in Supply Chain Management , 2000, Manuf. Serv. Oper. Manag..

[71]  B. Williams,et al.  Operations management. , 2001, Optometry.