Economic properties of multi-product supply chains

Abstract

We interpret multi-product supply chains (SCs) as coordinated markets, casting SC optimization problems as market clearing problems that allocate resources to stakeholders and determine market prices. The market interpretation allows us to establish fundamental properties that explain how physical resources (primal variables) and associated economic values (dual variables) flow in SCs. We use duality theory to explain why incentivizing markets by forcing stakeholder participation (e.g., by imposing demand or service provision constraints) yields artificial price behavior and economic losses. To overcome these issues, we explore market incentive mechanisms that use bids. Here, we introduce a product-based representation for SCs, and show that this representation allows us to determine minimum bids that activate markets. These results provide guidelines for SC formulations that properly remunerate stakeholders and for policy that fosters market transactions. The results are illustrated using an urban waste management problem for a city of 100,000 residents.