Supply Chain Price Coordination In Bounded Rationality

Coordination is the core of supply chain management issue. Scholarshave proposed a variety of coordination mechanisms to eliminate thedouble marginalization effect, one focus of which is the price coordinationmechanisms. Traditional supply chain price coordination research wasbased on the hypothesis of complete rationality. However, more and moreexperimental research found that the decision makers were actuallybounded rationality with fairness concerns. In recent years, there is a trendto model under the hypothesis of bounded rationality and check thefeasibility of traditional supply chain price coordination mechanisms.With the rapid development of retailing industry, the dominant powerof supply chain has been transferring from suppliers to retailers gradually.As one survey showed, almost80%of the surveyed suppliers in Chinaever experienced wholesale price depression forced by retailers during thenegotiation. For the increasing contradiction between suppliers andretailers in China’s retailing industry, this dissertation provides effectivesolutions for manufacturer to preserve profits in the disadvantagedenvironment, and achieve supply chain price coordination and fair trade.Firstly, we propose the demand function dependent on the retailingprice and market investment, and then discuss how price coordinationstrategy will make a difference on the retailer market investment decision, which provides some practical suggestions for dominant retailer’smanagement decisions. This is a point not involved by existing literatureson fairness concerns.Secondly, we construct four decentralized supply chain models fromtwo dimensionalities of complete-rationality/bounded-rationality andwith-price-depression/no-price-depression, and gain the equilibriums.Some sensitivity analysis is conducted to discover how manufacturer’sfairness concerns and retailer’s price depression affect the optimaldecisions and performances of supply chains.Finally, on one hand, we reveal that manufacturer’s fairness concernscan enhance the brand goodwill and alleviate the double marginalizationeffect, or conversely, discount the brand goodwill and exacerbate thedouble marginalization effect. However, it is impossible to coordinate thesupply chain. On the other hand, we show that, under certain conditions,the retailer’s price depression can enhance the brand goodwill and realizethe supply chain coordination through side payment. Taken together, twofactors’ coaction will improve the brand goodwill to the level ofcentralized supply chain, and eliminate the double marginalization effect.We propose efficient profits allocation solution to achieve the pricecoordination and fair transaction of supply chain.In conclusion, under both the hypotheses of complete rationality andbounded rationality, retailer’s price depression is one of the effectivesupply chain price coordination methods.