Negotiations in Competitive Supply Chains: The Kalai-Smorodinsky Bargaining Solution
35 Pages Posted: 4 Sep 2019 Last revised: 5 Feb 2021
Date Written: September 3, 2019
Supply chain contract negotiation has gain increasing attentions in recent years, and the studies involving negotiations in the operations literature almost exclusively apply the concept of the Nash bargaining (NB) solution. The NB solution, however, is derived based on the axiom of independence of irrelevant alternatives (IIA), an unrealistic assumption widely criticized in economics. Indeed, our analysis suggests that the NB solution can lead to unreasonable negotiation outcomes in competing supply chains. As an alternative, the Kalai-Smorodinsky (KS) solution has been applied in many fields, but has not been introduced to the supply chain contexts. We apply the KS solution to study contract negotiations in competing supply chains, and analyze its connection to and difference from the NB solution. In particular, we show that, compared with the NB solution, the KS solution appropriately captures the negotiation power shift induced by the decision ownership, the negotiation sequence, the vertical relationship, the competition intensity, the contract contingency, and the contract type.
Keywords: Kalai-Smorodinsky Bargaining Solution, Nash Bargaining Solution, Competing Supply Chain
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