A Power-Balanced Pareto-Equilibrium Profit Allocation in Supply Chain

Abstract

We study a single-period supply chain system under the wholesale price contract. It is well known that the system cannot be coordinated via the wholesale price contract. In this paper, by employing the power-dependence theory raised by Emerson (1962), we propose a power-balanced Pareto-improvement solution for this system. We consider two representative scenarios: 1) the supply chain being a bilateral monopoly and 2) the supply chain consisting of a single supplier and two non-competing retailers. For both scenarios, we demonstrate analytically and numerically that there exists a unique power-balanced Pareto-equilibrium, at which system coordination is achieved. We also show that the power-balanced Pareto-equilibrium is a Nash equilibrium.

Keywords

• Nash equilibrium
• Pareto-equilibrium
• power-dependence theory
• supply chain
• wholesale price contract