Competitive Pricing and Replenishment Policies in Distributed Supply Chain for a Deteriorating Item: A Game Approach

Abstract

This paper seeks to investigate the optimal competitive pricing and replenishment policies in a two-echelon supply chain with one manufacturer and one retailer for a single deteriorating item. The research is motivated by the studies of Yang and Wee (2000, 2002, and 2003), whose models are improved from three perspectives. First, their integrated models are extended to a distributed scenario where the manufacturer and the retailer make their decisions independently and simultaneously. Second, the decision-makings of pricing and replenishment are integrated to balance a tradeoff. Third, the fact that the deterioration in retailer's inventory must be an indispensable part of the manufacturer's output is neglected in Yang and Wee's studies, which makes their works less precise. This problem will be corrected in the paper. For these purposes, the Nash game approach is employed to formulate the structure of supply chain and analyze interactions between the manufacturer and the retailer. The existence of Nash equilibrium is guaranteed and an effective solution procedure is proposed. Furthermore, several useful managerial insights are derived and discussed through a numerical example and sensitivity analyses.