Date of Original Version

2-20-2010

Type

Working Paper

Abstract or Table of Contents

While advance booking programs have been shown to be effective for …firms to manage uncertain demand, the effectiveness of such programs is unclear when supply, demand, and price risks are present in a supply chain. Motivated by an advance booking program for managing these three types of risks in a flu vaccine supply chain, we present a two-stage Stackelberg game model to examine the dynamic interactions between a manufacturer and a retailer over two stages. In each stage, both …firms enter a Stackelberg game: the manufacturer sets his wholesale price and the retailer determines her order quantity. However, when making the decisions in the second stage, both …firms take into account the decisions chosen in the …first stage as well as the information about supply and demand revealed after the …first stage. Our analysis shows that the advance booking program is always benefi…cial to the manufacturer but not to the retailer especially when a supply shortage is likely to occur. Interestingly, we fi…nd that supply uncertainty and demand uncertainty affect the fi…rms' profi…ts in an opposite manner under the advance booking program: the …firms' expected pro…ts tend to decrease in supply uncertainty, but they tend to increase in demand uncertainty.