A General Equilibrium Model for Decentralized Supply Chains with Price-and Service-Competition

Professor Awi Federgruen

ABSTRACT

In our presentation, we develop a stochastic general equilibrium inventory model for an oligopoly, in which all inventory constraint parameters are endogenously determined. We propose several systems of demand processes whose distributions are functions of all retailers’ prices and all retailers’ service levels. We proceed with the investigation of the equilibrium behavior of decentralized supply chains with retailers facing this type of generalized competition (under demand uncertainty). We particularly focus on two-echelon supply chains with a single supplier servicing a network of retailers.

We also show that the decentralized system can be coordinated perfectly, in the sense that the aggregate expected profits in the decentralized system equal the expected profits in the centralized system when governed by an optimal combined set of so-called base-stock policies. The coordination scheme employs a specific set of constant, per unit wholesale prices and per unit backlogging cost penalties to be paid by the retailers to the supplier.

Our base models use fill rates to characterize the firms’ service levels; the final section of our presentation addresses alternative service measures, in particular customer waiting time percentiles.