©2007 INFORMS Pricing and Lead Time Decisions in Decentralized Supply Chains

This paper studies a decentralized supply chain consisting of a supplier and a retailer facing price- and lead-time-sensitive demands. A Stackelberg game is constructed to analyze the price and lead time decisions by the supplier as the leader and the retailer as the follower. The equilibrium strategies of the two players are obtained. Using the performance of the corresponding centralized system as a benchmark, we show that decentralized decisions in general are inefficient and lead to inferior performance due to the double marginal-ization effect. However, further analysis shows that the decision inefficiency is strongly influenced by market and operational factors, and if the operational factors are dominating, it may not be significant. This shows that before pursuing a coordination strategy with retailers, a supplier should first improve his or her own internal operations. Key words: decentralized supply chains; price- and lead-time-sensitive demand; customer utility; promised delivery lead time; Stackelberg game; decision inefficiency; operational and market factors; pricing; double marginalization History: Accepted by Candace A. Yano, operations and supply chain management; received March 2, 2004. This paper was with the authors 8 months for 3 revisions. 1