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Pricing and Lead Time Decisions in Decentralized Supply Chains

Author

Listed:
  • Liming Liu

    (Faculty of Business, Hong Kong Polytechnic University, Hung Hom, Hong Kong)

  • Mahmut Parlar

    (DeGroote School of Business, McMaster University, Hamilton, Ontario L8S 4M4, Canada)

  • Stuart X. Zhu

    (Department of Information and Systems Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

Abstract

This paper studies a decentralized supply chain consisting of a supplier and a retailer facing price- and lead-time-sensitive demands. A Stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower. The equilibrium strategies of the two players are obtained. Using the performance of the corresponding centralized system as a benchmark, we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginalization effect. However, further analysis shows that the decision inefficiency is strongly influenced by market and operational factors, and if the operational factors are dominating, it may not be significant. This shows that before pursuing a coordination strategy with retailers, a supplier should first improve his or her own internal operations.

Suggested Citation

  • Liming Liu & Mahmut Parlar & Stuart X. Zhu, 2007. "Pricing and Lead Time Decisions in Decentralized Supply Chains," Management Science, INFORMS, vol. 53(5), pages 713-725, May.
    • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:5:p:713-725
    DOI: 10.1287/mnsc.1060.0653
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    References listed on IDEAS

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