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Bargaining Chains

  • William S. Lovejoy


    (Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

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    We consider a firm that designs a new product and wishes to bring it to market but does not have ownership or control over all of the resources required to make that happen. The firm must select and contract with one of several possible tier 1 suppliers for necessary inputs, who do the same with their (tier 2) suppliers, etc. This general situation is common in industry. We assume tier-wise negotiations, sole sourcing within each tier, complete local information, and horizontal competition. We develop a bargaining-based solution to the negotiations between two adjacent multifirm tiers and show its consistency with familiar solution concepts from the theories of bargaining and cooperative games. We then link up multiple bargaining modules to generate chainwide predictions for efficiency and profitability in supply chains with an arbitrary number of tiers and an arbitrary number of firms per tier. We investigate the implications of the results for investments in process improvements or supplier development.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 12 (December)
    Pages: 2282-2301

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    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:12:p:2282-2301
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    1. Nagarajan, Mahesh & Sosic, Greys, 2008. "Game-theoretic analysis of cooperation among supply chain agents: Review and extensions," European Journal of Operational Research, Elsevier, vol. 187(3), pages 719-745, June.
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    7. Prat, A. & Rustichini, A., 1999. "Games Played Through Agents," Discussion Paper 1999-68, Tilburg University, Center for Economic Research.
    8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1986. "Fairness and the Assumptions of Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S285-300, October.
    9. Alvin E. Roth & V. Prasnikar & M. Okuno-Fujiwara & S. Zamir, 1998. "Bargaining and market behavior in Jerusalem, Liubljana, Pittsburgh and Tokyo: an experimental study," Levine's Working Paper Archive 344, David K. Levine.
    10. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
    11. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
    12. Haresh Gurnani & Mengze Shi, 2006. "A Bargaining Model for a First-Time Interaction Under Asymmetric Beliefs of Supply Reliability," Management Science, INFORMS, vol. 52(6), pages 865-880, June.
    13. Harrison, Glenn W & McKee, Michael, 1985. "Experimental Evaluation of the Coase Theorem," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 653-70, October.
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