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Coordination Mechanisms for Supply Chains Under Price and Service Competition

Fuqua School of Business, Duke University, Durham, North Carolina 27708
Graduate School of Business, Columbia University, New York, New York 10027
fernando{at}duke.edu
af7{at}columbia.edu

In a decentralized supply chain, with long-term competition between independent retailers facing random demands and buying from a common supplier, how should wholesale and retail prices be specified in an attempt to maximize supply-chain-wide profits? We show what types of coordination mechanisms allow the decentralized supply chain to generate aggregate expected profits equal to the optimal profits in a centralized system, and how the parameters of these (perfect) coordination schemes can be determined. We assume that the retailers face stochastic demand functions that may depend on all of the firms’ prices as well as a measure of their service levels, e.g., the steady-state availability of the products. We systematically compare the coordination mechanisms when retailers compete only in terms of their prices, and when they engage in simultaneous price and service competition.

Key Words: decentralized supply chains; coordination mechanisms; uncertain demands; infinite horizon
History: Received: January 5, 2004; accepted: December 10, 2006.

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