The Impact of Valuation Heterogeneity on Equilibrium Prices in Supply Chain Networks

Abstract

T his paper studies bargaining in two-sided supply chain networks where manufacturers on the demand side purchase an input from suppliers on the supply side. The manufacturers may have heterogeneous valuations on the input sold by the suppliers. In such a supply chain network, a manufacturer and a supplier must have a business relationship or "link" to bargain and trade with each other. However, a firm on one side of the supply chain network might not have a business relationship with every firm on the other side of the supply chain network. We show that valuation heterogeneity, supply and demand balance, and network structure are the main factors that influence the equilibrium prices, trading pattern, and surplus allocation in such a supply chain network. Valuation heterogeneity among manufacturers can mitigate unfavorable supply and demand balance to protect some surplus for the manufacturers and leads to higher price dispersion in the supply chain network. We demonstrate that bargaining effectively takes place in smaller subnetworks in a general supply chain network and develop an algorithm to decompose the general network into these smaller subnetworks, which simplifies the analysis of the general supply chain network significantly. We then identify types of supply chain networks that are efficient so that only manufacturers with the highest valuations are able to trade and types of links that can be added into a supply chain network to improve its efficiency.

Market equilibrium in multi‐tier supply chain networks

“…Other approaches that do not rely on tree networks often assume other special network assumptions such as two and three-tier networks. For example, Bimpikis, Candogan, and Ehsani (2019) and Bimpikis, Ehsani, and Ilk𝚤l𝚤ç (2019) and Pang et al (2017), considered a Cournot game while Nakkas and Xu (2019) analyze bargaining game in two-sided markets. Several papers in the operation management literature assume three-tier networks, where retailers intermediate by purchasing goods from a single manufacturer and selling goods to the ending market have been extensively studied (e.g., Bernstein and Federgruen (2005); Cachon and Lariviere (2005); Netessine and Zhang (2005)).…”

Supply Chain Competition: A Market Game Approach

“…The first stream focuses on seller power and buyer power in a supply chain using the Nash bargaining model (e.g., Bernstein and Nagarajan 2012, Kuo et al 2013, Feng and Lu 2013, Nakkas and Xu 2018, Chu et al 2018. The standard approach introduced by Nash (1950) assumes a fixed total profit that does not depend on bargaining outcomes, and this profit is split between buyers and sellers based on their bargaining power.…”

Evolutionary Game Analysis of the Effects of Problem Size and the Problem Proposing Mechanism on the Problem Processing Mechanism in a New Main Manufacturer–Supplier Collaborative System

“…Both the manufacturer and the supplier have to share the responsibility for any problems and risks in the production process and even after the delivery of the product. In order to ensure the quality of products and avoid the loss caused by risks, such as brand reputation damage, market share shrinkage, and so on, the manufacturer and supplier need to invest part of their resources to ensure the quality of products [25][26][27][28]. Our work will be based on the complete understanding [29] of manufacturer and supplier sharing risks and rewards in an effective collaboration with key strategic and operational results.…”