Leader-Follower Game in VMI System with Limited Production Capacity Considering Wholesale and Retail Prices

Posted: 24 Jul 2013

See all articles by Yugang Yu

Yugang Yu

University of Science and Technology of China (USTC)

Liang Liang

University of Science & Technology of China

George Q. Huang

The University of Hong Kong

Date Written: December 20, 2006

Abstract

VMI (Vendor Managed Inventory) is a widely used cooperative inventory policy in supply chains in which each enterprise has its autonomy in pricing. This paper discusses a leader-follower Stackelberg game in a VMI supply chain where the manufacturer, as a leader, produces a single product with a limited production capacity and delivers it at a wholesale price to multiple different retailers, as the followers, who then sell the product in dispersed and independent markets at retail prices. An algorithm is then developed to determine the equilibrium of the Stackelberg game. Finally, a numerical study is conducted to understand the influence of the Stackelberg equilibrium and market related parameters on the profits of the manufacturer and its retailers. Through the numerical example, our research demonstrates that: (a) the market related parameters have significant influence on the manufacturer’ and its retailers’ profits; (b) a retailer’s profit may not be necessarily lowered when it is charged with a higher inventory cost by the manufacturer; (c) the equilibrium of the Stackelberg equilibrium benefits the manufacturer.

Keywords: Stackelberg Game, Supply Chain, Vendor Managed Inventory

Suggested Citation

Yu, Yugang and Liang, Liang and Huang, George Q., Leader-Follower Game in VMI System with Limited Production Capacity Considering Wholesale and Retail Prices (December 20, 2006). ERIM Report Series Reference No. ERS-2006-054-LIS. Available at SSRN: https://ssrn.com/abstract=2297701

Yugang Yu (Contact Author)

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

Liang Liang

University of Science & Technology of China ( email )

Anhui
Hefei, Anhui 230026
China

George Q. Huang

The University of Hong Kong

Pokfulam Road
Hong Kong, Pokfulam HK
China

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