Network design of a decentralized distribution supply chain: Analysis of non-cooperative equilibrium vs. coordination with discount or buyback mechanism


1 Department of Industrial Engineering, Islamic Azad University, South Tehran Branch, Tehran, Iran

2 Department of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran


This paper develops a model for illustrating how a manufacturer can use his initiative to organize the retailers when they take decisions as independent actors. The candidate retailers are able to distribute product over geographical dispersed markets with stochastic demands. Each manufacturer’s decision about selecting a set of retailers results in a unique distribution network design. Taking transportation and inventory costs into account, each candidate retailer determines order quantity to satisfy markets’ demands, while the manufacturer specifies wholesale price pursuing uniform or retailer-specific pricing polices depending on trade legislations. In this single period problem and under mild assumptions on demands distributions, we show a non-cooperative equilibrium exists for each distribution network design. We also propose distinctive coordination mechanisms corresponding to the pricing policies. Using these mechanisms in each design of the distribution network, profits of the manufacturer and retailers are better off compared to the non-cooperative situation. Lastly, numerical examples presented in the paper, comprising the sensitivity analysis of some key parameters, seek to compare the results of different distribution network designs under various pricing policies and yield some applicable managerial insights.