A stochastic and asymmetric-information framework for a dominant-manufacturer supply chain |
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Authors: | Amy Hing Ling Lau Hon-Shiang Lau Yong-Wu Zhou |
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Institution: | 1. School of Business, University of Hong Kong, Pokfulam, Hong Kong;2. Department of Management Sciences, City University of Hong Kong, Kowloon, Hong Kong;3. College of Business, Oklahoma State University, Stillwater, OK 74078, USA;4. Institute of Logistics and Supply Chain Management, School of Management, Hefei University of Technology, Hefei, Anhui 230009, P.R. China |
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Abstract: | 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 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. |
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Keywords: | Supply chain Stackelberg game Information asymmetry |
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