MODELING RISK OF LOSING A CUSTOMER IN A TWO-ECHELON SUPPLY CHAIN FACING AN INTEGRATED COMPETITOR: A GAME THEORY APPROACH

Abstract

In a competitive market, customer decision is made to maximize his utility. It can be assumed that risk of losing a supply chain’s customer can be defined based on products utility from customer point of view. This paper takes account of product price and service level as competition criteria. The proposed model is based on non-cooperative game theory, for one-manufacturer and one-retailer supply chain facing an outside integrated-competitor. The aim of the research is to investigate the trade-offs of responsiveness and efficiency in a supply chain. Therefore, we consider product utility from customer point of view as an objective along with traditional profit objective function. Three scenarios are proposed in the paper: competition based on profit gained, competition based on responsiveness to customer needs, and finally, competition based on the profit gained and responsiveness to customer needs, concurrently. Numerical examples are presented including sensitivity analysis of key parameters. We illustrate that the relative importance that player considers for profit compared to the risk of losing customer has a critical role in supply chain prosperity.