Dynamic decision-making in a two-stage supply chain with repeated transactions

Abstract

This research investigates how the experience learned in repeated transactions by consumers and manufacturers would affect supply-chain partners' strategic decisions such as price, order quantity and service level. Consumer demand depends on two factors: (1) retailer price and (2) service level provided by the manufacturer in the past and current transaction periods. Game theory is used to understand interactions between the horizontally competitive suppliers and their vertical interactions to the common retailer in the one-period looking-ahead decision environment. Dynamic-system concepts are integrated into the game-theoretic model for understanding the evolution of the strategic decisions over multiple time periods. The research shows that the manufacturer with any type of cost-advantage for providing more services to its customers will capture a larger market than its competitor. Comparison of our model to the myopic model indicates that the myopic suppliers, who ignore the customer learning effect on future periods, shrink their market sizes and earn less profit over time. The manufacturers who use the learning experience to plan future investment can prevent this phenomenon from happening and enhance their competitiveness.