Game Theory and Its Business Applications: Supply Chain Coordination
In this essay I would like to consider how some basic principles of game theory can be
successfully applied to business environment. In particular, it is examined how, based on game
theory concept, supply chain coordination may benefit to all market players: suppliers, retailers,
supply chain, and consumers. First, I give a brief overview of what a supply chain is. Second,
two types of supply chains, namely decentralized and centralized, are considered with respect to
its optimal outcomes. Next, it is necessary to analyze how problems arising in the decentralized
supply chains can be tackled by means of coordination contracts. With this regard, buyback
contract is examined.
Supply Chain
In a supply chain (SC), there are multiple firms which are owned and operated by
different parties. Each firm makes decisions out of its own interests and objectives. For the
purpose of this particular essay, two-stage SC with one supplier and one retailer is considered.
The retailer purchases goods from the supplier and, in turn, sells them to the end consumers.
The supplier has a unit cost of production being equal to c. He charges the retailer ω per
