Bargaining Strategy in a Production and Distribution Problem

George K. Chacko
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George K. Chacko: Graduate School of Business Administration, University of California, Los Angeles, California

Operations Research, 1961, vol. 9, issue 6, 811-827

Abstract: An attempt is made to select a bargaining strategy for a multiplant, multi-product, manufacturing company, engaged in negotiations with two of its distributors. The basis for negotiations is the company's net profit equivalent , and the distributors' net profit. Net profit is excess of income over expenditure. Net profit equivalent is net sales minus variable cost, statistically determined from 52-month data, treating output of the two component groups of products as the independent variable, and their cost, the dependent variable. The company's decision to manufacture in three, instead of four, plants affects the three types of revenue earned by the distributors. How should the company act vis-à-vis its distributors? The company may enter into coalitions with the customers of the distributors, and bid to supplant the distributors. It may negotiate with other manufacturing companies to supply the distributor customers, thus saving warehousing costs. So can the customers collude among themselves, with other manufacturing companies, etc. These coalitions, simultaneously entered into by the same players, who band together for and against the same party at the same time, in order to achieve joint-profit maximization in a nonzero-sum game, are defined for the first time in this paper as concomitant coalitions . The influence of the power to “bind” of the weaker players, who improve their gains by “some voluntary, but irreversible freedom of choice” is examined in the imputations. The dominant strategies are identified by inspection, and the corresponding outcome for the different players worked out has intutive appeal. Accepted by the company management as pertinent to long-term implementation, this analysis demonstrated how an otherwise loss situation could be successfully turned into one of significant profit.

Date: 1961
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