Competition of two supply chains with different risk structures: applying market research option

Abstract: Demand uncertainty obliges all participants through a supply chain to make decisions under uncertainty. These decisions extend across price, investment, production, and inventory quantities. We take account of competition between two supply chains under demand uncertainty. These chains internally are involved in vertical pricing competition; however, they externally participate in horizontal pricing and service level competitions by offering a single-type product to the market. Since firms may have various attitudes against demand uncertainty and its related risks, different risk structures for competitive supply chains are considered. We assume that risk-averse firms are able to decrease demand uncertainty by information gathered from market research. For risk-averse participants in a chain, market research investment is an appropriate ground for vertical coordination, which diminishes risk through a supply chain. Optimal strategies based on game theory are obtained for different risk structures; furthermore, for each structure the effects of risk sensitivity as well as market research efficiency on these optimal strategies are investigated. Finally, we propose two scenarios for information sharing between risk-averse participants.

How to cite this paper

 Hafezolkotob, A & Makui, A. (2012). Competition of two supply chains with different risk structures: applying market research option.International Journal of Industrial Engineering Computations , 3(2), 159-184.

Refrences

Agrawal, V., & Seshadri, S. (2000). Risk intermediation in supply chains. IIE Transaction, 32(9), 819–831.

Allon, G., & Federgruen, A. (2007). Competition in service industries. Operation Research, 55(1), 37-55.

Bar-Shira, Z., & Finkelshtain, I. (1999). Two-moments decision models and utility-representable preferences. Journal of Economic Behavior Organization, 38(2), 237–244.

Basuroy, S., & Nguyen, D.(1998). Multinomial logit market share models: Equilibrium characteristics and strategic implications. Management Science, 44(10),1396-1404.

Bazaraa, M.S., Sherali, H.D., & Shetty, C.M. (2006). Nonlinear Programming: Theory and algorithms.New Jersey: John Wily and Sons.

Beckmann, M.J., & Funke, U.H. (1978). Product attraction, advertising and sales: Towards a utility model of market behavior. Mathematical Method Operation Research, 22(1), 1-11.

Bell, D.E., Keeney, R.L., & Little, J.D.C. (1975).A market share theorem. Journal of Marketing Research, 12,136-141.

Bernstein, F., & Federgruen, A. (2007).Coordination mechanisms for supply chains under price and service competition. Manufacturing & Service Operations Management, 9(3), 242-262.

Bernstein, F., & Federgruen, A. (2004).A general equilibrium model for industries with price and service competition. Operations Research, 52 (6), 868-886.

Cachon, G.P., & Netessine, S. (2003). Game theory in supply chain analysis, in: Simchi-Levi, D., Wu S.D., & Shen Z.(Eds) Handbook of Quantitative Supply Chain Analysis: Modeling in the e-business. Kluwer Academic Publishers, Boston, 1-14,

Chopra, S., & Meindl, P. (2007). Supply Chain Management, Strategy, Planning, and Operations. New York:Prince Hall.

Cooper, L.G. (1993). Market-Share Models, in: Eliashberg, J.,Lillien, G.L.,(Eds), Handbooks of Operations Research and Management Science. Elsevier Science Publishers, Amsterdam, 257-313.

Gallego, G., Huh, W.T., Kang W., & Phillips, R.(2006).Price competition with the attraction demand model: Existence of unique equilibrium and its stability. Manufacturing & Service Operations Management, 8(4), 359-375.

Gan, X.H., Sethi, S.P., & Yan, H.M. (2005). Channel coordination with a risk-neutral supplier and a downside-risk-averse retailer. Production and Operations Management, 14(1), 80–89.

Ganeshan, R., Jake, E., Magazin, M.J., & Stephens, P. (1998). A taxonomic review of supply chain management research, in:Tayur, S., Ganeshan, R., & Magazine, M.J. (Eds) Quantitative models for supply chain management, New York, Springer-Velag, LLC.

Gilbert, S.M., & Cvsa, V. (2003). Strategic commitment to price to stimulate downstream innovation in a supply chain. European Journal of Operational Research, 150,617–639.

Gruca, T.S., & Sudharshan, D.(1991). Equilibrium characteristics of multinomial logit market share models. Journal of Marketing Research, 28, 480-482.

He, X., Prasad, A., Sethi, S.P., & Gutierrez, G.J.(2007). A survey of stackelberg differential game model in supply and marketing channels. Journal of System Science and System Engineering,16, 385-413.

Koltler,P., & Keller, K.L. (2006). Marketing Management. New Jersey Pearson: Prentice Hall.

Kogan, K., & Tapiero, C.S. (2007). Supply Chain Games, Operations Management, and Risk Valuation.New York: Springer.

Leeflang, P.S.H. (2008). Modeling Competitive Responsiveness, in:Wierenga, B.(Ed.) Handbook of marketing decision models. International series in operation research & management science, Springer science.

Leng, M., & Parlar, M. (2005). Game theoretic applications in supply chain management: A review. INFOR, 43 (3), 187-220.

Mariampolski, H. (2001). Qualitative Market Research: A Comprehensive Guide. SAGA, California: Thousand Oaks.

Mesak, H.I., & Means,T .(1998). Modeling advertising budgeting and allocation decisions using modified multinomial logit market share models. Journal ofthe Operational Research Society. 49,1260-1269.

Monahan,G.E. (1987). The structure of equilibria in market share attraction models. Management Science, 33(2), 228-243.

Tsay, A.A. (2002). Risk sensitivity in distribution channel partnerships: implications for manufacturer return policies. Journal of Retailing, 78(2), 147-160.

Tsay, A.A., & Agrawal, N. (2000). Channel dynamics under price and service competition. Manufacturing & Service Operations Management, 2(4), 372– 391.

Wu, C., Petruzzi, N.C., & Chhajed, D. (2007). Vertical integration with price-setting competitive newsvendors. Decision Sciences, 38(4), 581-610.

Xiao, T.J., & Yang, D.Q. (2008).Price and service competition of supply chains with risk-averse retailers under demand uncertainty. International Journal of Production Economics, 114(1),187-200.

Xiao, T.J., & Yang, D.Q. (2009). Risk sharing and information revelation mechanism of a one-manufacturer and one retailer supply chain facing an integrated competitor. European Journal of Operational Research,196,1076-1085.

Yang, D., Xiao, T., & Shen, H. (2009).Pricing, service level and lot size decisions of a supply chain with risk-averse retailers: implications to practitioners. Production Planning and Control, 20(4), 320–331.