Game Theory and Supply Chain Networks

Supply chain network is the collection of physical locations, transportation vehicles and supporting systems through which the products and services are managed and ultimately delivered. It connects suppliers, manufacturers, distributors and retailers with competition and collaboration. Each decision maker in the network aims to achieve profit maximization, capacity maximization, and delay minimization. Erengüç, Simpson, and Vakharia (1999) review the research progress using operations research technology on supplier selections, plants setup, resources allocation, and configuration of distribution networks in supply chains. In an increasingly integrated global economy, the research area of supply chains undergoes a remarkable change. Pure optimization that assumes each decision maker, or player acts independently, is limited. Actually, at nearly all stages of a decision process, interactions across decision makers are not negligible. On the contrary, the interactions significantly affect the decision-making. For example, each decision maker may observe or conjecture the action of other suppliers, manufacturers, distributors, retailers, and customers, based on his information of others. Game theory (Myerson, 1991; Fudenberg & Tirole, 1991) studies the mathematical models of conflict and cooperation between intelligent rational players. In this setting, each player performs his or her best response based on his knowledge of other players’ actions and the game structure. Game theory has become a vital tool to explore the strategic interactions between decision makers in supply chains. Based on different criteria we have different types of games. For example, based on the availability of common knowledge of players’ payoffs and strategies, we have complete information and incomplete information games. According to players’ moving sequences, we have simultaneous or sequential games. Based on the time scale of games, we have static or dynamic games. Among all supply chain operational models, two-stage games are mostly investigated. The suppliers determine the inventory competitively in the first stage and supply jointly (e.g., transshipment) to meet the customer demand in the second stage. The non-cooperative and cooperative game models are set up to analyze the tradeoff between the decision-making in those two stages. In this article, we review the research of game theory and network methodology in supply chain management, analyze the challenges and foresee future research directions. The rest of the article is structured as follows. The first section describes a series of game models in supply chain field, in particular the centralized and decentralized models, and the experimental game theory in supply chains. The main focus section presents the key methodologies in game-theoretic networks, such as the non-cooperative and cooperative games, network equilibrium modeling and analysis. The final section concludes with implications and future research directions. Fei He University at Buffalo, The State University of New York, USA