A game theoretic approach to coordinate pricing, ordering and co-op advertising in supply chains with stochastic demand

Document Type: Article

Authors

Department of Industrial Engineering, Electronic Branch, Islamic Azad University, Tehran, Iran

Abstract

This paper combines the newsboy problem with the cooperative advertisement problem in the presence of uncertain demand which depends on retail price as well as both local and national advertising expenditures to coordinate pricing, ordering, and advertising decisions in a manufacturer-retailer supply chain. A game theoretic approach is adopted to determine the equilibrium values of the decisions. Three different game scenarios based on the newsboy problem model are developed and analyzed: 1) Stackelberg manufacturer game in which manufacturer as the dominant power plays the role of leader in the market and the follower retailer makes its own best decisions after observing the leader decisions, 2) Nash game wherein both manufacturer and retailer have equal power in the market and make their decisions simultaneously to find their own best strategies and 3) centralized scenario in which retailer and manufacturer make the best decisions by information sharing and joint cooperation. The equilibrium decisions are obtained exactly in the three scenarios. Some corollaries are also presented and theoretically proved to show the relationships among the variables in centralized vs. decentralized supply chain. Finally, some numerical examples are randomly generated and a sensitivity analysis is carried out to show capabilities of the proposed models.

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