Prof. Georgia Perakis
Massachusetts Institute of Technology
Talk:
Price of Price-only Contracts in Competitive Supply Chains when Pricing is Endogenous
Abstract:
In this work, we investigate a two-tier supply chain in which there is a supplier who proposes a simple price-only contract to several sellers who are competing in the market through selling differentiated products to customers. The goal in this work is to determine how i) vertical competition (i.e. among the supplier and the sellers) and horizontal competition (i.e. among the sellers) as well as ii) endogenous pricing decisions from the sellers, affect the supply chain in a market where products are not homogeneous but rather differentiated. In particular, our goal is to determine how prices, order quantities and chain-wide profits get affected due to lack of coordination in the supply chain. Typically papers in the Operations Management literature address these issues by considering pricing as an exogenous decision, and/or that there is a single supplier and a single seller (or at best a duopoly of sellers). Finally, even when there are multiple sellers, the products are usually assumed to be substitutable (for example, one can think of airlines selling seats in flights serving the same market) and the sellers are identical (symmetric). The question that arises how does one address the issues raised above without imposing such assumptions that may be viewed as unrealistic. There is a huge literature in Operations Management studying various contracts that coordinate the supply chain. Nevertheless, price-only contracts are used a lot in practice due to their simplicity. Our goal in this work is to provide some insights on why this could be the case, as well as understanding ``how much'' do price-only contracts leave on the table.In particular, this research considers several asymmetric (not identical) sellers who compete either through deciding how to price in the market (price competition) or by deciding how much quantities to sell (quantity competition). To determine how chain-wide profits as well as prices and quantities are affected due to horizontal and vertical competition, we derive tight lower and upper bounds on prices, order quantities and chain-wide profits. We conclude that for substitutable products (in either price or quantity competition), the loss of profit due to lack of coordination in the supply chain is no more than 25%. Furthermore, we illustrate that in many real life scenarios, this loss is much smaller (e.g., 15% or less). This implies that in a substitutable product market, there is little room for improvement from more elaborate contracts, which are often costly to implement. On the other hand, we find that for complementary products, the decentralized supply chain is less efficient. In fact at least 25% of the total chain wide profit is lost compared to the profit in the centralized setting. This result suggests that large efficiency gains can be achieved through more complex contracts that coordinate the chain. Finally, we investigate how consumers are affected due to the lack of coordination in the supply chain. We determine (contrary to perhaps obvious intuition) that consumers are hurt due to competition and lack of coordination. We illustrate that in particular, in the setting of complementary products the consumers are particularly affected. For this reason, there is even more a strong need for coordinating contracts (joint work with Wei Sun and Justin Teo).
Biography:
Georgia Perakis is the William F. Pounds Professor at the Sloan School of Management at MIT. She joined the faculty at Sloan in 1998. She received an M.S. degree and a PhD in Applied Mathematics from Brown University. In the Spring of 2006 she visited for her sabbatical Columbia University. Georgia Perakis' research interests include applications of optimization and equilibrium in revenue management, pricing, competitive supply chain management and transportation. She has widely published in journals such as Operations Research, Management Science, Mathematics of Operations Research and Mathematical Programming among others. She has received the CAREER award from the National Science Foundation and subsequently the PECASE award from the office of the President on Science and Technology. She has also received an honorable mention in the TSL Best Paper Award, the Graduate Student Council Teaching Award for excellence in teaching, the Sloan Career Development Chair and subsequently the J. Spencer Standish Career Development Chair. Recently Perakis received the William F. Pounds chair. Perakis has passion supervising her students and builds lifelong relationships with them. So far she has graduated 9 PhD and 13 Masters students.Starting in July 2010, Perakis will serve as the co-director from the Sloan School for the LGO program. Perakis serves as an Associate Editor for the journals Management Science, Operations Research and Naval Logistics Research. She is a senior editor for POM and an Area Editor in the area of Supply Chain Management and Services for the journal Networks and Spatial Economics and America's editor for the journal of Pricing and Revenue Management. Perakis has served as a member of the INFORMS Council and served as the chair of the Pricing and Revenue Management Section of INFORMS. She is currently the VP for Meetings of the MSOM Society of INFORMS. She has co-organized the MSOM 2009 conference and is in the organizing committee of the 2010 MSOM conference. She has also been the co-chair and co-organizer of the Annual Conference of the INFORMS Section on Pricing and Revenue Management for several years and the chair of the cluster on the same topics for the annual INFORMS conference for several years.
