Application of Game Theory on Inventory Level Decision Making
International Journal of Business and Economics Research
Volume 3, Issue 6, December 2014, Pages: 211-219
Received: Nov. 12, 2014; Accepted: Nov. 21, 2014; Published: Nov. 25, 2014
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Authors
Masoud Vaziri, Dept. of Industrial and Systems Engineering, University of Rhode Island, Kingston, USA
Manbir Sodhi, Dept. of Industrial and Systems Engineering, University of Rhode Island, Kingston, USA
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Abstract
Many companies producing durable products, profit more from spares than the base parts. In a competitive and uncertain aftermarket, an Original Equipment Manufacturer (OEM) can benefit from Game Theory to manage spare parts inventories. We study the spare parts inventory game as an N-person non-zero-sum single-shot game where players play simultaneously. The game is restricted to a two-player (the OEM and the market) non-cooperative game setup. The market is an unreasoning entity whose strategic choices affect the payoff of the OEM, with no interest in the outcome of the game. This is a game against nature, which means the OEM plays against the market. The OEM decides on a pricing strategy (in a competitive manner with low cost manufacturers or will-fitters to absorb more customers) and the order-up-to stock level, and its inventory level strategy is not dominated – i.e. the game has a mixed strategy solution. This solution maximizes the payoff for the OEM by setting the price and the inventory level based on assumptions on the lower and upper bounds of the demand’s distribution parameters.
Keywords
Spare Parts Management, Spare Parts Pricing, Game against Nature, Stochastic Demand
To cite this article
Masoud Vaziri, Manbir Sodhi, Application of Game Theory on Inventory Level Decision Making, International Journal of Business and Economics Research. Vol. 3, No. 6, 2014, pp. 211-219. doi: 10.11648/j.ijber.20140306.12
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