978-1-4244-8385-3/11/$26.

00 2011 IEEE MSIE 2011 1029

Research on the Cooperation Between Supply Chain
Enterprises Based on Game Theory
Mu Weizhe
Management School
Harbin University of commerce
Harbin, China
muweizhe@126.com


AbstractIn 21 century, the market competition tends to
compete between supply chain and supply chain. The competitive
power of the supply chain comes from the cooperation of supply
chain company. This paper made research on the cooperative
relationship between supply chain enterprises, analyzed the non-
cooperative and cooperative game strategy between supply chain
enterprises, compared the cooperation efficiency in both cases.
The efficiency of most supply chain is low under non-cooperative
strategy, and cooperative game can make the supply chain get
greater return in the theory. The conclusion is that long-term
cooperation in the supply chain can lead to greater benefits for
the supply chain enterprises. Therefore, cooperative game
strategy can improve the overall efficiency of the supply chain,
and also allows for maximum individual interests. The results
make all parties to obtain higher returns, achieve win-win
situation.
Index Termsgame theory, supply chain, cooperative game,
prisoner's dilemma
I. INTRODUCTION
The relationship between the supply chain enterprises is a
mixture of competition and cooperation. Fundamentally
speaking, the supply chain enterprises whether to cooperate is
the game issue of the supply chain. We know that a supply
chain enterprise's benefit depends not only on its own behavior,
but also on the transaction with which the behavior of the other
supply chain. The game mode is divided into two categories:
cooperation and non-cooperation. The cooperation is not only
for their own interests but focus more on common interests,
and reaches a binding agreement. Either party makes its own
strategy choices; do not know what strategy the other party will
choose, but each party will predict the strategy what the other
party will choose. To achieve long-term interests, the rational
parties will establish the target of maximize the common
interests.
The cooperative game theory in supply chain management
has been studied. Christy and Gorut
[1]
set up a game theory
frame model, to describe the relationships between buyers and
supplier in the supply chain. Cachong and Lariviere
[2]

demonstrated the problem whether there is no cost signal based
on the promises that manufacturers imposed supplier. In the
game analysis and supply chain partner selection, Lin xudong
and Zhu shunquan
[3]
established a pay game matrix, according
to the Nash equilibrium theory, to determine the scope of the
choice, then choose the best partners. In the supply affect the
game analysis of trust, Zhou yong, Zheng pi e and Zhang hao
[4]

point out that the trust was the key enterprise relationship in the
supply chain. The trust was divided into participants trust and
control trust; they constitute the basis of the supply chain. Chen
yuhua and Zhu shunquan
[5]
proved that when the players with
long-term profits for the target, cooperation was the optimal
strategy. This illustrated the possibility and necessity to
establish long-term cooperation relations in the supply chain.
Chen yanru, Jiang yangsheng and Pu yun
[6]
in a class of supply
chain join game model, illustrated the supply chain was a new
type of relationship mode between manufacturers, and supply
chain management was essentially a management about the
relationship management.
II. THE ANALYSIS OF THE GAME STRATEGY BETWEEN
SUPPLY CHAIN ENTERPRISES
A. The Analysis of the Non-cooperative Game Strategy
Between Supply Chain Enterprises
1) The equilibrium analysis of the non-cooperative Game
Strategy
Assume that a supply chain contains only one supplier and
one manufacturer. The supplier provides raw materials to the
manufacturer; the manufacturer obtains products by processing
raw materials. The market price of product is decided by the
quantity of products the manufacturers to sell. Assume that the
raw material which the supplier provides is the only raw
material which the manufacturer production product needs. The
depreciation is zero.
And assume that to produce one unit of product requires
one unit of raw materials. That is the input-output ratio is 1:1,
and divides the bilateral benefit equally. The two enterprises
carry on two stage complete information dynamic game, the
step is:
a) The manufacturer purchases raw material to the
supplier, the supplier determines their optimal bidding first.
b)The manufacturer determine their own optimal order
quantity after considers the market demand curve, the quotes
of supplier and the production costs of these products.
c) The supplier provided raw material to the supplier on
time.
Assume that the demand curve which the manufacturer
faces is
(
m
P b aQ a = + 0b0) 1
1030
In the formula:

m
P The market price of the product when the number of
manufacturer's sales is Q
Q Representatives of both the number of products, but
also for the required amount of raw materials
For ease of distinction, assume that the number of products
is
c
Q , the number of raw materials is
y
Q .
Assume that
m
C is the unit processing cost of product of
the manufacturer, and
s
P is the quoted price of the supplier.
s
P
is the function of Q which is the number of raw materials
required for the manufacturers.
m
R is the manufacturer's profit.
Manufacturer's profit is not only the function of market prices
and processing costs, but also the function of the quoted price
of the supplier.
Because the supplier makes the first decision, the supplier's
price is a real variable, is not a guess variable. Manufacturer
determines the order quantity after he gets the quoted price of
the supplier in the first phase.
s
C is the unit cost of the raw
materials from the supplier.
s
R is the suppliers profit.
s
R
depends not only on his own quoted price and production costs,
but also on the manufacturer's order quantity. Then
( )
m m s m
R P P C Q = 2
( )*
s s s
R P C Q = 3
Based on non-cooperative strategy, when the supplier
considers the price, he considers that the manufacturer will
maximize profits as a principle. The formula that
manufacturers to maximize profits is
/ 0
m
dQ dR =
The marginal revenue is 0:
2 0
s m
b aQ P C + =
( ) / 2
s m
Q P C b a = + 4
So, the supplier will pull (4) into (3), then
( ) ( ) * / 2
s s s s m
R P C P C b a = + 5
To get the derivative:
( ) 2 / 2 0
s s m
P C b C a + =
Then
( ) / 2
s s m
P C b C = + 6
The quotes of supplier is
s
P , the manufacturer's order
quantity is Q, pull (6) into (4), then
( ) / 2 / 2
s m m
Q C b C C b a = + +


Then
( ) / 4
s m
Q C C b a = + 7
At this point, the supplier's price and order quantity have
been determined. The two sides will obtain the expected
benefits according to their own calculated way. The
manufacturer's expected benefits is:
( ) / 2 *
m s m m
R b aQ C b C C Q = + +


Then
( )
2
/16
m s m
R C C b a = + 8
Similarly, the supplier's expected benefits is:
( )
2
/ 8
s s m
R C C b a = + 9
Although their game strategy is non-cooperative, their
actual benefits should be calculated according to the supply
chain. Then,
( ) *
a m m s
R P C C Q = 10
Pull (7) into (10), then the common interest is:
( )
2
3 /16
a s m
R C C b a = + 11
To average, then

2
3( ) / 32
m s s m
R R C C b a = = + 12
Then the game is over. The two sides both choose non-
cooperation strategy, and we know this is the Nash equilibrium
after the average. But in this Nash equilibrium, we do not make
the supply chain to achieve Pareto optimal. That is not the
average interests that based on the maximize profits as a
starting point (10). The results suggest that competitive
equilibrium do not make the supply chain to achieve Pareto
optimal. In addition, it is the supplier to make pricing decisions
first in the model. As a first mover advantage, the suppliers
to improve their income by increasing supply prices, and the
manufacturers have to reduce the number of orders to decline
the overall revenue.
2) The instability of cooperation
In above analysis, we simply assume that the benefits of
both sides to cooperate equally with the result that it is higher
than the unilateral interests, when the strategy is non-
cooperation. To the supplier, it is lower than the unilateral
interests, when the strategy is non-cooperation. After the
reunification of the supply chain, the increased revenue is all
obtained by the manufacturer. It can be said that is the leverage
punishment by the distribution of benefits. To punish the
suppliers still choose non-cooperative strategies under first
mover advantage.
For the supplier, the cooperative supply chains will no
returns through high pricing strategy to improve his income.
Certainly there will no incentive to participate in co-operation.
Because their products (raw materials) may still be sold at a
price with
s
P even if it is not in the supply chain. In fact, the
1031
model ignored the two sides need to pay the appropriate co-
management costs when the two sides cooperation. This will
lead that the suppliers gains not as many as uncooperative.
(Here we assume that cooperations profit is greater than the
sum of the cost to both sides.) Therefore, the profit distribution
after the cooperation, for suppliers to be redistributed between
the two sides, that is to be allocated in accordance with (8) and
(9). The distribution of profits will take into account both
efficiency and equity factors. The two sides will bargain to
distribute profits. The potential costs of bargaining may be
greater than the increased revenue under cooperation. So that
the cooperation in fact can not be reached. Therefore, the
cooperation is likely to be unstable.
B. The Analysis of the Cooperative Game Strategy Between
Supply Chain Enterprises
In reality, the supply chain management is more likely to
develop long-term relationship, fewer but the number of
partners required, while the number of co-operation is very
much. In the theory of modern supply chain management, the
supply chain which is constitute of this small work groups
under the long-term close co-operation, will be composed of
more efficient production. It will continue to study the process
of cooperation in the supply chain. Both of the process of
cooperation reached between the parties and the distribution of
benefits will be researched, making all parties in the supply
chain to benefit from cooperation, to achieve Pareto
improvement of game results.
If the Prisoner's Dilemma Game is infinitely repeated, some
strategies will be better than non-cooperative strategies have
been taken in each round. First, assume that the manufacturer
adopt a tit for tat strategy. As a flip of the players hold tit for
tat strategy, it will "punish" the upper hand that choose non-
cooperative in any round opponent through the non-
cooperation. But the punishment is measured, thus there will be
a possibility to get a common return from a cooperative
relationship.
If the prisoner's dilemma game is in the first round, then
begin the second round by the same conditions. After the first
game, the supplier believes that cooperation can get more
revenue and assumes the other will also take the cooperation
strategy. To get the derivative of (10), we can get the ideal
order quantity:
( ) / 2
m s
Q C C b a = + 13
Pull (13) into (5), then get the derivative. We can get this
price when the manufacturer gets this order quantity:

s s
P C = 14
At this point you can easily reach the interests of the
supplier is 0, the interests of manufacturer equal to the supply
chain, the manufacturer also adopt a cooperative strategy,
so ( ) *
a m m m s
R R P C C Q = = , pull (1) into it:
( )
2
/ 4
a m s
R C C b a = + 15
Then equal distribution of interests:
( )
2
/ 8
m s s m
R R C C b a = = + 16
At this time the game is over, both sides choose cooperation
strategies. After the split, we know this is the Nash equilibrium,
the supply chain reach the Pareto optimal in this Nash
equilibrium. It is clear that the change is carried out under
repeated games in long-term cooperation. There will not such a
change, if the two sides in the last game stop cooperating. But
the last act does not directly affect the judgments, the benefits
of both sides should be the weighted average of the two game
proceeds, and the weighted average (assuming the same weight)
will enable the two sides recognized the benefits under
cooperation strategies is higher then non-cooperative strategies.
It makes the game to continue for the next round and be more
inclined to cooperative strategy.
III. THE COMPARATIVE ANALYSIS OF THE EFFICIENCY
BETWEEN NON-COOPERATION STRATEGY AND COOPERATIVE
STRATEGY
A. The Efficiency Analysis of Supply Chain Under Non-
cooperative Strategy
Non-cooperative game theory emphasizes that individuals
maximize the benefits; the result may be efficient, inefficient or
even ineffective. Supply chain management requires the supply
chain enterprises play to their strengths to get specialization
advantages. Specialization create a huge potential for improve
the efficiency of the supply chain, but it also implies a certain
degree of information asymmetry, market monopoly and
externalities. Therefore, the pursuit of the supply chain
enterprises to self-interest often leads to inefficiencies in the
whole supply chain or even the disintegration.
For example, in the condition of asymmetric information
and externalities, the "bullwhip effect" of the supply chain
shows that the inefficiencies of the supply chain were caused
by individual rational decision. When the all supply chain
enterprises make production or supply decisions only according
to the demand information from its adjacent downstream
enterprises, the demand information will amplify step by step
along the supply chain from the consumer. When supply and
demand information reach the original supplier, the actual
needs of consumers has generated great deviation. To meet this
demand, upstream supplier owns higher inventory than the
lower supplier. Therefore, the overall revenue of supply chain
will decline.
In the case of non-cooperation, the manufacturers and
suppliers all make their efforts to maximize heir own interests.
Plans to make the interests of manufacturers
It makes the scheme interests of the manufacturer is (8),
the interests of the supplier is (9). But in the end the interest
only is (12), this clearly is low efficient. The two sides are
more likely to cause conflicts because of the profit is
( )
2
/ 32
s m
C C b a + .It is obviously that most of the supply
chain is low efficiency under non-cooperative strategy.
1032
B. The Efficiency Analysis of Supply Chain Under
Cooperative Strategy
The cooperation strategy emphasizes that collective
rationality, efficiency, impartiality and fairness. The concept of
cooperation is closer to the concept of Pareto optimality. In
game theory, to the supply chain which is composed of two or
more members for the common purpose of action, members set
the expense of their own utility function, and create a collective
utility function which is a new, and used to determine their
collective behavior.
It is found that, in the analysis of the two-stage complete
information dynamic game between the supplier and
manufacturer, the cooperation makes the interests of the supply
chain actually increased ( )
2
/16
s m
C C b a + . This shows that
the two sides do not have to fight for the interests
of ( )
2
/ 32
s m
C C b a + . Despite the effectiveness of the
supplier only the same with their own best interests, he has
omitted the transaction costs when the manufacturer will accept
the high price of
s
P . So the next round he will still be tending
to cooperation strategy. For the manufacturer, the higher profit
will be more exciting. Its a typical Nash equilibrium.
Therefore, in terms relative to the non-cooperative game,
cooperative game can make the supply chain for greater return
in the theory. However, as each supply chain enterprise is
independent economic entity, the final decision making is to
maximize their individual expected profit as the goal.
Therefore, we studied the cooperative game should not only
adhere to individual rationality of the supply chain, but also the
cooperative behavior model that meet the supply chain
collective rationality.
The organization form of long-term relationships provides a
way to solve the problem of "prisoner's dilemma" game theory.
Although the cooperation in repeated games just based on
individual rationality and common knowledge, the game results
also enhance the collective efficiency. Because in the
organization of long-term relationship, the long-term gains
from mutual cooperation may remove the contradiction
between short-term incentive and the behavior that not only
consistent with individual rationality but also consistent with
collective rationality. In the long-term relationship, supply
chain organization should be committed to create the common
faith to trust that others will cooperation. Cooperation is not
always the dominant strategy, only everyone believes that
others will cooperate, the cooperation is the individual rational
choice. Therefore, in order to build a successful supply chain
partnership between members, it means that the choice of
supply chain enterprise is right in the early stage of cooperation,
and the full range of communication and cooperation from the
strategic level to the operating level after the supply chain
formed. Meanwhile, both sides should work to enhance their
core competitiveness, making the parties strengthen rely on
each other, and the cooperation relations will become
increasingly closer.
IV. CONCLUSION
We analyzed the game relations between the supply chain
enterprises, and analyze the non-cooperation and cooperation
strategies between the supply chain enterprises by Prisoner
theory. The results show that in the premise of meeting the
individual interests, the competition between supply chain
enterprises led to the low efficiency of the overall supply chain.
The parties in the repeated game mechanism, to the cooperation
strategy, will both to improve the overall efficiency of the
supply chain, and also allows for maximum individual interests.
The results make all parties to obtain higher returns, achieve
win-win situation. The use of the repeated games theory can
get Pareto optimal state. Through the comparison of the
benefits to both sides, we have come to the conclusions that
long-term cooperation in the supply chain can lead to greater
benefits for the supply chain enterprises. But there is a problem
that the supply chain enterprises will be lack of enthusiasm.
1) The non-cooperation strategy of the supply chain
enterprises which is chosen in the state that the information is
complete of the both sides, and it will be impact of supply
chain enterprises to re-cooperation.
2) If the supply chain makes the two sides to reach
agreement on long-term cooperation, the two sides will be tend
to try cooperative strategy after weighing the interests. In
principle, the cooperation strategy is always the most optimal
efficiency. And in the long-term cooperation, the supply chain
enterprises which adopt full cooperation strategy will always be
more efficiency than the supply chain enterprises which has the
history of non-cooperative strategy.
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