A supply chain member should set its margin later if another member's cost is highly uncertain

Kenji Matsui

European Journal of Operational Research, 2019, vol. 275, issue 1, 127-138

Abstract: Recently, there have been several cases in which a large-scale retailer has demanded a margin for a consumer product from a supplier before the supplier has determined the margin or the wholesale price, reflecting a power shift from upstream suppliers to downstream retailers in supply chains. Given the recent change of power structures in supply chains, we investigate a practical decision-making problem of when a supply chain member should set its margin in the presence of uncertainty based on a stochastic game-theoretic supply chain model. We assume a typical two-echelon supply chain that consists of a manufacturer and a retailer, each of which determines the margin of a product based on private information of its marginal cost. Hence, the cost structure of a firm is uncertain and is known only to the firm. We construct an incomplete information game model with this setting, drawing the following clear-cut managerial implication: a supply chain member should set its margin later if the other member's cost is highly uncertain. By delaying decision-making, the late-moving member can make a more precise inference on the cost of the early-moving member by observing the margin demanded by the early-mover, thereby choosing a more desirable margin. Despite the current power shift from manufacturers to large-scale retailers in various consumer product categories, our result warns a retailer that if it assumes leadership to demand a margin from a manufacturer in an uncertain environment simply because it has power, it may cut its own throat.

Keywords: Supply chain management; Power structure; Pricing; Game theory (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:275:y:2019:i:1:p:127-138

DOI: 10.1016/j.ejor.2018.11.027

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