A Bargaining Framework in Supply Chains (The Assembly Problem)

30 Pages Posted: 19 Oct 2007

See all articles by Mahesh Nagarajan

Mahesh Nagarajan

University of British Columbia (UBC) - Sauder School of Business

Yehuda Bassok

University of Southern California - Management and Organization Department

Date Written: 2002

Abstract

We examine a decentralized supply chain supply chain in which a single assembler buys complementary components from n suppliers and assembles the final product in anticipation of demand. Players take actions in the following sequence. First, (Stage 1) the suppliers form coalitions between themselves. Second, (Stage 2) the coalitions compete for a position in the negotiation sequence. Finally, (Stage 3) the coalitions negotiate with the assembler on allocations of the supply chain's profit. We model the multilateral negotiations between the suppliers and the assembler sequentially, i.e., the assembler negotiates with one coalition at a time. Each of these negotiations is modeled using the Nash bargaining concept. Further, in forming coalitions, we assume that players are farsighted. We then predict, at equilibrium, the structure of the supply chain as a function of the players' relative negotiation powers. In particular, we show that the assembler always prefers the outcome where suppliers do not form coalitions. However, when the assembler is weak (low negotiation power) the suppliers join forces as a grand coalition. But when the assembler is powerful, the suppliers stay independent, which is the preferred outcome to the assembler.

Keywords: Decentralized assembly systems, Nash Bargaining, Negotiation Power, Commitment tactics, Farsighted stable coalitions

Suggested Citation

Nagarajan, Mahesh and Bassok, Yehuda, A Bargaining Framework in Supply Chains (The Assembly Problem) (2002). Available at SSRN: https://ssrn.com/abstract=1021602 or http://dx.doi.org/10.2139/ssrn.1021602

Mahesh Nagarajan (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Yehuda Bassok

University of Southern California - Management and Organization Department ( email )

Los Angeles, CA 90089
United States

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