In microeconomic theory, the consumer is a central figure who is usually defined as an entity who chooses from a given set of feasible options [84]. In a supply chain management system, the consumer is the terminal point of the chain, and her behavior and preference will directly affect market demand and total chain performance. Without a proper and better understanding of consumer’s behavior and preference, orderly trading will be dis- rupted which can jeopardize the proper functioning of the whole supply chain. Examples of this abound in recent history, such as the recent collapse of the several film companies and the shrinking of a media giant company, as the result of consumers shifting from traditional film and newspaper to digital and internet media, and the loss of traditional market to competitors. It is therefore crucial to investigate consumer’s behavior and pref- erence by including her in the supply chain study, and investigate how its performance can be enhanced or improved through her interaction with other members in the chain. Motivated by this viewpoint, our objective in this chapter is to provide a comprehensive study of a supply chain incorporating the supplier, retailer with a strategic consumer as
a three–person game and investigate the interaction between them and examining the possibility of forming different coalitions among the three players.
Over the last few decades, most research in supply chain management have mainly focused on inventory planning, development of various incentive schemes and proper co- ordination of the supply chain in order to obtain favorable outcomes for chain members. Among numerous published literature in this area, we have referred some related pa- pers in Chapter 2 and 3, such as Freeland [48], Abad [1], Weng [165], Viswanathan and Wang [156], Jaber and Osman [70]. It must be emphasized that all these research were from the supplier and retailer’s perspective, ignoring totally the consumer’s behavior and preference in the supply chain.
In recent years, researchers have found that game theory is an essential tool in inves- tigating the behavior of supply chain members and in modeling the complex interactions that often occur between them. This has led to a broad application of game theory in sup- ply chain management. Research which are related to game theoretical approach in supply chain include but are not limited to, for example, Corbett and deGroote [31], Lau and Lau [88], Chu and Lee [27], Lau et al. [89], Esmaeili et al. [42], Esmaeili and Zeephongsekul [43]. Recently, research in this area has been extended into multi–level supply chain which is more complicated than two-level supply chain due to an increase in a variety of possible interactions. For instance, Munson and Rosenblatt [107] studied a three-level supply chain involving a single supplier, manufacturer and retailer. The authors proposed a quantity discount policy imposed by the manufacturer, who is the most influential player in the chain, to the supplier in order to decrease the costs among the channel members. Jaber et al. [71] investigated a three-level supplier-manufacturer-retailer supply chain where an incentive mechanism has been set up for sharing profit among channel members in order to maximize supply chain profit. Similar three-level supply chains have been studied by Lee [91] and Lee and Moon [90]. In addition, Leng and Parlar [95] have also considered a three-level supply chain using a cooperative game approach via the Shapley value. Zhang and Liu [172] proposed a game mechanism to coordinate a three-level green supply chain based on revenue sharing, Shapley values and Nash bargaining.
coordination between players who are the upstream members, i.e. supplier and retailer, of a supply chain. They ignored the consumer who, as the terminal member of the chain, could influence the decisions made by the upstream members and whose welfare may also be affected by those decisions. To the best of our knowledge, very little research have been done in investigating the interaction between the consumer and the upstream members. Chesnokova [25] and Matsui [104] examined consumer’s welfare based on return policy. Su and Zhang [144] studied the effect of strategic consumer behavior on supply chain performance. However, in these papers, the complex interactions that often occurred between consumer and upstream members were overlooked. Rather than examining the consumer’s behavior and welfare from the consumer’s viewpoint, these were examined instead from the perspectives of the upstream members.
In this chapter, we propose a three-person supply chain which consists of a single supplier, retailer who will interact with a strategic consumer in several non-cooperative games. In each production cycle, the retailer orders a quantity of product from the supplier and sells it to the consumer. The supplier will determine the wholesale price and allowable shortage. The consumer’s decision whether to purchase the product will depend on her valuation of the product’s quality. In a three-person game, each player may act individually as a self maximizer or some may form coalitions in an attempt to achieve a better outcome. The best scenario will be obtained in a grand coalition among all the participants in the chain, but this is unrealistic in supply chains with three or more players due to factors such as cost sharing, profit sharing and a variety of strategic considerations. Therefore, we will limit the scope by investigating a non-cooperative Stackelberg leader– follower game under two scenarios: (i) no coalition is formed among the players and each acts non-cooperatively, and (ii) a selection of two players act cooperatively by forming coalition against the third player. The choice of a Stackelberg game is due to the fact that it reflect many interactions prevailing in the market place where one or more players may have more power than the other players. Hence the strategies of the players will depend on whether they are the leader or follower in the game.
Under the first scenario, we will let each player takes turn as the leader and the other two players assume the role of the followers. Under the second scenario, we consider two
types of coalition among players: Supplier– Retailer Coalition (hereafter called SRC) and Retailer-Consumer Coalition (hereafter called RCC). In each case, the coalition has more power than the lone player, i.e the coalition is the leader while the lone player the follower. The effectiveness of leadership and coalition formation to a player’s strategy and profit will be compared under these two scenarios.
After the introduction, this chapter is organized as follows. Section 5.2 provides as- sumptions which underlie our models. In Section 5.3, the consumer’s utility model, the retailer’s and supplier’s profit models are presented. In Section 5.4 and 5.5, we investigate the interaction between retailer, supplier and consumer using a Stackelberg game, with and without coalition, respectively. Numerical examples, including a sensitivity analysis, will be provided in each of these sections to demonstrate and compare the results between the different scenarios. Section 5.6 concludes this chapter with some suggestions for future research.