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Transshipment of Inventories Among Retailers: Myopic vs. Farsighted Stability

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  • Greys Soši'{c}

    () (Marshall School of Business, University of Southern California, Los Angeles, California)

Abstract

The author considers a model of a decentralized distribution system consisting of n retailers selling an identical product. Retailers face a stochastic demand and must order their initial inventory before this demand is realized. After demand realization, retailers decide how much of their unsold inventory or unsatisfied demand they want to share with other retailers. This is followed by a transshipment of leftover inventories and distribution of the additional profit generated through inventory sharing. The author addresses the following issue: Suppose that the retailers distribute the profit from inventory sharing according to an allocation rule that induces retailers to share their residuals in a way that maximizes the additional profit, such as the Shapley value, but may not belong to the core. Is it likely that, in this framework, all retailers will jointly share their residuals and not form subcoalitions? Previous research has looked at this problem from a myopic viewpoint and concluded that the grand coalition is not stable. Unlike the prior work, the author looks at stability in a farsighted sense. That is, retailers do not consider only their immediate payoffs but are also concerned with reactions of other retailers to their actions. In a symmetric setting, with identical additional unit revenues from transshipments generated by all retailers, farsighted retailers always maximize their allocations by not defecting from the grand coalition. The author also provides conditions when the same is true for nonidentical additional unit revenues.

Suggested Citation

  • Greys Soši'{c}, 2006. "Transshipment of Inventories Among Retailers: Myopic vs. Farsighted Stability," Management Science, INFORMS, vol. 52(10), pages 1493-1508, October.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:10:p:1493-1508
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0558
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    References listed on IDEAS

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    1. Konishi, Hideo & Ray, Debraj, 2003. "Coalition formation as a dynamic process," Journal of Economic Theory, Elsevier, vol. 110(1), pages 1-41, May.
    2. R.J. Aumann & S. Hart (ed.), 2002. "Handbook of Game Theory with Economic Applications," Handbook of Game Theory with Economic Applications, Elsevier, edition 1, volume 3, number 3, August.
    3. Licun Xue, 1998. "Coalitional stability under perfect foresight," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 603-627.
    4. Jun Zhang, 2005. "Transshipment and Its Impact on Supply Chain Members' Performance," Management Science, INFORMS, vol. 51(10), pages 1534-1539, October.
    5. Lingxiu Dong & Nils Rudi, 2004. "Who Benefits from Transshipment? Exogenous vs. Endogenous Wholesale Prices," Management Science, INFORMS, vol. 50(5), pages 645-657, May.
    6. Nils Rudi & Sandeep Kapur & David F. Pyke, 2001. "A Two-Location Inventory Model with Transshipment and Local Decision Making," Management Science, INFORMS, vol. 47(12), pages 1668-1680, December.
    7. Kwan Eng Wee & Maqbool Dada, 2005. "Optimal Policies for Transshipping Inventory in a Retail Network," Management Science, INFORMS, vol. 51(10), pages 1519-1533, October.
    8. Plambeck, Erica L. & Taylor, Terry A., 2004. "Implications of Breach Remedy and Renegotiation for Design of Supply Contracts," Research Papers 1888, Stanford University, Graduate School of Business.
    9. Daniel Granot & Greys Sov{s}i'{c}, 2005. "Formation of Alliances in Internet-Based Supply Exchanges," Management Science, INFORMS, vol. 51(1), pages 92-105, January.
    10. Hartman, Bruce C. & Dror, Moshe & Shaked, Moshe, 2000. "Cores of Inventory Centralization Games," Games and Economic Behavior, Elsevier, vol. 31(1), pages 26-49, April.
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    Cited by:

    1. Hung, Yick-Hin & Li, Leon Y.O. & Cheng, T.C.E., 2011. "Trading reserved capacity independently among supply chains," International Journal of Production Economics, Elsevier, vol. 133(1), pages 105-112, September.
    2. Tang, Shao-Long & Yan, Hong, 2010. "Pre-distribution vs. post-distribution for cross-docking with transshipments," Omega, Elsevier, vol. 38(3-4), pages 192-202, June.
    3. Fiestras-Janeiro, M.G. & García-Jurado, I. & Meca, A. & Mosquera, M.A., 2011. "Cooperative game theory and inventory management," European Journal of Operational Research, Elsevier, vol. 210(3), pages 459-466, May.
    4. Dong, Yan & Xu, Kefeng & Evers, Philip T., 2012. "Transshipment incentive contracts in a multi-level supply chain," European Journal of Operational Research, Elsevier, vol. 223(2), pages 430-440.

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