Stability and Endogenous Formation of Inventory Transshipment Networks

Abstract:     
This paper studies a cooperative game of inventory transshipment among multiple firms. In this game, firms first make their inventory decisions independently under uncertain demands, and then decide collectively how to transship excess inventories to satisfy unmet demands. Instead of coalitions that are used in all previous studies, we use networks of firms as the primitive, which offer a richer representation of relationships among firms by taking coalitions as special cases. When the profit generated from transshipment is allocated according to the marginal contribution of each firm to its network, we find that various network structures such as complete, circle, and hub-spoke systems are not always stable in the sense that some firms may find it more profitable to form subnetworks; instead, the line system, in which all firms with residual supplies are placed on one side and all firms with residual demands are placed on the other side, is the only network structure that is stable for any residual amounts. However, there exists an allocation mechanism under which a given network system is always stable for any residual amounts. When firms establish networks endogenously, we characterize pairwise Nash stable networks, and show that these networks underperform the corresponding networks in centralized systems.

Keywords: Games/group decisions, Cooperative, Networks, Inventory

working papers series