Game Theoretical Approach in Supply Chain Management

Supply chain management has been described as an integration of business process that is associated with operational management and marketing problems, such as inventory control, information sharing and supply chain coordination. Over the last few decades, researchers in the area of supply chain management have been very active in seeking optimal policies for supply chain members in order for them to achieve effective and efficient outcomes. Game theory is generally described as the study of mathematical models concerning how rational individuals or organizations make decisions in a competitive environment. Due to competition and cooperation existing amongst supply chain members, the theory of non-cooperative and cooperative game became a natural choice used for studying supply chain related problems, especially in analyzing the interactions and coordination between supply chain members. This has resulted in a substantial body of works aimed at providing further insights into how game theory can be used to elucidate the nature of the problems that can arise in basic and complex supply chains. Many existing studies on supply chain management made the somewhat unrealistic assumptions that demand is deterministic and shortages are not permitted. In reality, due to factors such as irregular production capacity or unanticipated demands, shortages will occur and both the supplier and retailer’s decisions will be influenced by the occurrences of these periodic events. Moreover, these studies totally ignored the consumer who is the terminal member of the chain. However, due to the advent of World Wide Web which provides a platform for exchanging information between supply chain members, consumer’s preference and purchasing behavior are very influential in determining supplier and retailer’s decisions. Conversely, the consumer’s welfare will be affected by supplier and retailer’s decisions, such as in pricing of products and planning of inventories. Most supply chain games assume symmetric information, which are games whereby each player has the same information on other players’ characteristics such as their cost structures, payoffs, decisions or beliefs. When this is not the case, we have game with asymmetric information. Considering supply chain with asymmetric information necessitate the construction of a type space for each player which comprises the player’s private