Coordination Mechanisms for Supply Chains Under Price and Service Competition

In a decentralized supply chain, with long-term competition between independent retailers facing random demands and buying from a common supplier, how should wholesale and retail prices be specified, in an attempt to maximize supply-chain wide profits? We show what types of coordination mechanisms allow the decentralized supply chain to generate aggregate expected profits equal to the optimal profits in a centralized system, and how the parameters of these (perfect) coordination schemes can be determined. We assume that the retailers face stochastic demand functions which may depend on all of the firms’ prices as well as a measure of their service level, e.g., the steady-state availability of the product. We systematically compare the coordination mechanisms when retailers compete only in terms of their prices, and when they engage in simultaneous priceand service competition.