A Game Theoretic Approach for Exploring Feasibility of Buyer-Supplier Co-operation

T. A. S. Vijayaraghavan, Sumit Sarkar, Arijit Mitra

Abstract


In studying Buyer-Supplier Cooperation, earlier researches by authors included behavioral variables in the construct on Supply Management Orientation (SMO), and subsequently developed a scale for measuring them using an instrument COURTESY. The scale was tested through a questionnaire survey. The research clearly indicated the existence of perception gaps among the buyer and supplier for several dimensions of COURTESY and concluded that co-operative actions should be taken by the supply chain managers to minimize those gaps.

The present paper attempts to address the feasibility of the recommendation proposed in Vijayaraghavan et al. (2012), through the use of Game theory. By concluding that co-operative action are necessary, the former research simply prescribes an investment which any firm needs to incur in order to achieve a certain degree of co-operation with its partner(s). This investment always needs a justification in terms of profitability, which cannot be ensured in the presence of moral hazard. This paper treats SMO as a contract signed between a buyer and a supplier. The model uses a principal-agent problem framework, where the buyer is the principal and the supplier is the agent. The supplier can either deliver a standard product, or make an attempt to deliver the high-value product. Delivery of a high-value product is uncertain. The buyer needs to incentivize the supplier to make an attempt to deliver the high-value product. We use a comparative static approach to show that it is easier for the buyer to incentivize the supplier in presence of a co-operative investment that reduces the uncertainty in delivery of the high-value product. The paper also shows that for the buyer there is an optimal share of the co-operative investment.

Keywords: Co-operation, COURTESY, Game theory, Contract, Uncertainty


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