Game theoretic analysis of one manufacturer two retailer supply chain with customer market search

Abstract

It is common that when a stock out occurs at a retailer the customer may go to another retailer. This phenomenon is often referred to as the customer market search. This paper analyzes the one manufacturer two retailer supply chain while considering the customer market search behavior. Game theoretic models are built to investigate the implications of this phenomenon in scenarios where wholesale price is exogenous or endogenous. Conditions for the uniqueness of game equilibria are derived in each case. It shows that customer market search behavior leads to higher total order quantity of retailers and higher supply chain efficiency if the wholesale price is exogenous. In contrast, in the endogenous wholesale price scenario, customer market search behavior may decrease the total order quantity of retailers and result in lower supply chain efficiency because the manufacturer can gain much more profit by setting a higher wholesale price. We also study the impacts of the lost sales (brand loyalty) penalties which are incurred when customers׳ demand exceeds the retailers׳ (manufacturer׳s) inventory. It shows that the lost sales (brand loyalty) penalties have similar effects on the supply chain performance when the retailers compete. Numerical analysis illustrates the supply chain members׳ decisions and the supply chain performances of our models.