Development of a new model based on game theory to analyze supplier development considering simultaneous cooperation and competition in supply chain

Kafi, Farhad; Fatemi Ghomi, Seyyed Mohammad Taghi

Development of a new model based on game theory to analyze supplier development considering simultaneous cooperation and competition in supply chain

Document Type : Research Paper

Authors

Farhad Kafi

Seyyed Mohammad Taghi Fatemi Ghomi

Amirkabir University of Technology

Abstract

Firms increasingly purchase goods and services they require while focusing on their core competencies. In case of supplier’s poor performance, the typically aware buying firms either run development programs to improve the supplier or switch to a new better supplier depending on certain conditions. The conditions seem to be more challenging if the buying firm purchases its supplies from a firm with whom he competes in the market, a practice nowadays with many instances from various industries. In order to examine the issue analytically, we propose a mathematical model to compare supplier development and switching. We consider three firms competing in the market of a final product where one of them purchases his product from one of the competitors. Being dissatisfied with his current supplier’s price, the buying firm may participate in a cooperative investment with his supplier to help him reduce costs. Second, he may switch to the other lower cost supplier and competitor in the market. Despite being counter-intuitive, the mathematical results show that cooperation with a competing supplier is preferable to supplier switching under certain conditions.

Keywords

Game theory

Supplier development

Supplier switching

Purchasing

Cooperation

Copmpetition

Subjects