A profit surplus distribution mechanism for supply chain coordination: An evolutionary game-theoretic analysis

Abstract

In supply chain (SC) systems, channel coordination can be achieved by incentive alignment contracts. The contracting mechanisms reported in the literature are usually “short-term-based” and the respective decisions are assumed to be static. However, real world supply chains (SCs) operate in the long term and decisions may evolve when time passes. As a result, this paper analytically explores the instability of the short-term coordination strategies and examines the evolutionary behaviors of SC members towards SC coordination. Moreover, it incorporates the effects of SC members’ evolutionary strategy adoption into profit surplus distribution among them. To be specific, an evolutionary game theory-based model, namely the “profit surplus distribution (PSD) mechanism for supply chain coordination”, is proposed to investigate how long-term behaviors of SC members will affect the coordination decisions (i.e., choosing to collaborate) and their share of coordination profit surplus. Based on a real case in consumer electronics, we analytically investigate a two-level SC consisting of a retailer investing in sales-effort and a population of manufacturers investing in innovation effort. Using the evolutionary game theory, we examine the relationship between the evolutionary strategies of SC members towards channel coordination and the profit surplus distribution among them. The results reveal that the coordination strategy is preferred by a great percentage of manufacturers in the long term and their share of coordination profit surplus plays a critical role in affecting their evolutionary preference (and vice versa).