Prisoner’s dilemma on behavioral choices in the presence of sticky prices: Farsightedness vs. myopia

Abstract

When making decisions in a dynamic environment, myopic supply chain members tend to ignore the future effects of their decisions on the evolution of state dynamics. By contrast, far-sighted decision-makers consider about the impacts of current decisions on both current profits and future profits. In order to study how behavioral choices affect the operation decisions and profits of supply chain members, we develop a differential game with sticky prices, where one manufacturer purchases components from one supplier and makes final products for end customers. The supplier decides on its wholesale price while the manufacturer sets its production quantity. Either of supply chain members has two behavioral choices: myopia and farsightedness. We derive and compare equilibrium solutions under four different behavioral combinations. Our analysis shows that there always exists a prisoner’s dilemma caused by behavioral choices: farsightedness is a dominant strategy for either the supplier or the manufacturer, but both to act myopically makes both of them better off. Furthermore, comparing with other scenarios, the whole supply chain obtains the highest profit when both players are myopic. In addition, we introduce a revenue sharing contract with static wholesale price to mitigate the adverse impacts of the prisoner’s dilemma.