Transshipment occurs frequently in retailing industry and has a great impact on profits of supply chain firms. In this paper the impact of transshipment on a decentralized supply chain is examined. A game theoretic model is set up; under uniformly distributed demand, the Subgame Perfect Nash Equilibrium is analytically obtained. Specifically, retailers' inventory and the manufacturer's wholesale price at equilibrium is obtained. Then conditions under which a manufacturer and retailers in a decentralized supply chain are better off or worse off from transshipment are shown. Thresholds in the transshipment price such that the manufacturer is indifferent whether retailers tranship or not are calculated. How these thresholds depend on the critical fractile as well as the salvage value of leftover inventory is also shown. Finally, contracts that achieve coordination in a decentralized supply chain where retailers transship are constructed. Results of the paper can help managers in a decentralized supply chain to make decisions on transshipment under various situations.
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