1. Consider a simple supply chain consisting of a wholesaler (W) and a retailer
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Question
1. Consider a simple supply chain consisting of a wholesaler (W) and a retailer (R). Each of them has two alternatives (1 and 2) and the payoffs (in millions of dollars) resulting from all possible combinations of alternatives are shown in the following table, where the first number in the parentheses represents the payoff to W and the second number represents the payoff to R: 1 (-80,30) (45, 35) 2 (-50, -20 50,-70) (1) If W and R are selfish and unwilling to cooperate with each other a) Which alternative should each of them select to arrive at an equilibrium? (b) What is the resulting payoff for each of them? (c) What is the total payoff in the entire supply chain? If W and R are willing to cooperate by reaching an agreement to evenly split the total payoff under cach of (2) the four possible combination of payoffs: (a) What is the new payoff table? (b) Which alternative should cach of them sclect to arrive at an cquilibrium? (c) What is the resulting payoff for cach of them? (d) What is the total payoff in the entire supply chain? (3) Based on your findings in Parts (1) and (2) above, will W, R, and the entire supply chain benefit from the coordination between the two players? Why?Explanation / Answer
1. If they are selfish and unwilling to Co-operate, they would try to make the most of the worst case situation
If retailer chooses alternative 1, wholesaler's choice 1 and 2 would payoff 30, -20 for the retailer with worst case being -20
If retailer chooses alternative 2, wholesaler's choice 1 and 2 would payoff 55 and -70 with worst case being -70. Hence, the retailer would go for Alternative 1 to minimise his losses.
If the distributor goes for for alternative 1, his payoff would be -80 or 45 and if alternative 2 then -50 or 50. So, he would go for alternative 2 to minimize losses.
So, the Equilibrium payoff would be (-50,-20) the worst case.
Resulting payoff is -50 for wholesaler and -20 for Retailer.
Total payoff for the supply chain is - 70
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