Economic Models

Christy and Grout (1994) develop an economic, game-theoretic framework for modeling the buyer-supplier relationship in a supply chain. The basis of this work is a 2 x 2 supply chain relationship matrix, which may be used to identify conditions under which each type of relationship is desired. These conditions range from high to low process specificity, and from high to low product specificity. Thus, the relative risks assumed by the buyer and the supplier are captured within the matrix. For example, if the process specificity is low, then the buyer assumes the risk; if the product specificity is low, then the supplier assumes the risk. For each of the four quadrants (and therefore, each of the four risk categories), the authors go on to assign appropriate techniques for modeling the buyer-supplier relationship. For the two-echelon case, the interested reader is referred to Cachon and Zipkin (1997).