Technical Note—Local Bargaining and Supply Chain Instability

Thành Nguyen ()
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Thành Nguyen: Krannert School of Management, Purdue University, West Lafayette, Indiana 47907

Operations Research, 2017, vol. 65, issue 6, 1535-1545

Abstract: We analyze the behavior of a competitive n -tier supply chain system, where agents bargain with each other locally. We study the influence of transaction costs on the convergence of the system to a stationary outcome. In particular, we consider a dynamic bargaining game among a finite set of agents and its replications, and use a limit stationary equilibrium to examine the system’s behavior as the population’s size goes to infinity. The convergence of the system to a limit stationary equilibrium would capture the common belief that as the market gets large, it converges to a competitive and stable outcome. However, we prove that depending on the underlying transaction costs, the system might not converge to such an equilibrium. Interestingly, our result shows that a small increase in the transaction cost at one end of the chain can be greatly amplified and shifts the system away from the steady state. When a limit stationary equilibrium exists, we show that it is unique. We use such an equilibrium outcome to study trade surplus among sellers, buyers, and middlemen.

Keywords: noncooperative bargaining; incentives; supply chains (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:65:y:2017:i:6:p:1535-1545

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