Applied Mathematics and Computation 250 (2015) 580592

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Applied Mathematics and Computation

journal homepage: www.elsevier.com/locate/amc

Pricing and retail service decisions in fuzzy uncertainty

environments
Jing Zhao , Lisha Wang
School of Science, Tianjin Polytechnic University, Tianjin 300387, China

a r t i c l e

i n f o

Keywords:
Pricing
Retail service
Game theory
Fuzziness

a b s t r a c t
This paper studies the pricing and retail service decisions of a product in a supply chain
with one manufacturer and two retailers. It is assumed that the supply chain is operated
in fuzzy uncertainty environments. The fuzziness is associated with the customer
demands, manufacturing costs and service cost coefcients. Three different game structures are considered, i.e., Manufacturer-leader Stackelberg, Retailer-leader Stackelberg,
and Vertical Nash. Expected value models are developed to determine the optimal pricing
and retail service strategies. The corresponding analytical equilibrium solutions are
obtained by solving the models. Finally, numerical examples are presented to illustrate
the effectiveness of the theoretical results, and to gain various marketing strategies
employed under different situations.
2014 Published by Elsevier Inc.

1. Introduction
With the current dynamic and competitive environment, the market must compete with more complicated strategies
than simply lowering the products price, because the consumers perception of value and their purchase decisions are
inuenced not exclusively by the products selling price, but also the amount of service that accompanies it. And service
can help the customers obtain maximum value from their purchases [5]. Here, service is taken to broadly represent all forms
of demand-enhancing effort, including customer service before and after the sale, product advertising, on-time product
delivery and product placement, and the overall quality of the shopping experience.
Early research focusing on attributes such as product quality and service can be found in the economics literature, e.g.,
Spence [15], Dixit [3]. In marketing literature, Perry and Porter [14] focused on a type of service that has a positive
externality effect across the retailers. Yan and Pei [22] considered retail services and rm prot in a dual-channel market,
and suggested that the improved retail services effectively improve the supply chain performance in a competitive market.
Lu et al. [12] studied three possible supply chain scenarios under manufacturer service and retail price, and obtained the
results and the modeling approach which are useful references for managerial decisions and administrations. Lederer and
Li [10] considered a more general problem by considering multiple classes of customers with general service time that is
class-specic. Bernstein and Federgruen [2] developed a stochastic general equilibrium inventory model for an oligopoly
with price and service competition. Ho and Zheng [7] considered a situation in which two competing service providers compete in terms of guaranteed delivery time and customer service level. The literature mentioned above studied the service
decision with deterministic or random demand, whereas did not consider the fuzzy uncertainty of the supply chain.
Corresponding author.
E-mail address: zhaojing0006@163.com (J. Zhao).
http://dx.doi.org/10.1016/j.amc.2014.11.005
0096-3003/ 2014 Published by Elsevier Inc.

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

581

In order to make supply chain management more effective, the fuzzy uncertainty that happens in the real world cannot be
neglected. For example, it is difcult to provide exact estimates of the manufacturing cost (e.g. procurement costs may be
volatility), the customer demand (e.g. due to the innovation of products and market turbulence), the product supply (e.g.
due to the weather conditions) and so on. However, the probability distribution may not be available in practice or may
be difcult to estimate from limited data points. Under these scenarios, the fuzzy theory provides a reasonable way to deal
with the possibility and linguistic expressions. The fuzzy theory provided by Zadeh [23] is an appropriate modeling tool
when uncertain parameters cannot be described in stochastic distributions. There have been many researchers who adopted
fuzzy theory to depict uncertainty in supply chains. They mainly focus on coordination problem [20,21], inventory problem
[4,6,17], supplier selection problem [1,8], contract problem [9,19], pricing problem [27,18]. We review the literature on pricing decision in fuzzy uncertainty environments as follows. Zhou et al. [27] focused on the pricing problem of a single product
with fuzzy customer demand. Wei and Zhao [18] considered the optimal pricing decision problem of a fuzzy closed-loop
supply chain with retail competition. Lin and Chang [11] presented a method for order selection and pricing of manufacturer
using a fuzzy approach. Zhao et al. [25,26] analyzed the pricing problem of substitutable products in a fuzzy supply chain.
Zhao et al. [24] considered the optimal pricing and service decisions in a supply chain with two competing manufacturers
and one common retailer. However, all of the above literature except [24] did not consider the service decision problem in
fuzzy uncertainty environments.
As far as we know, no research has considered the pricing and retail service decision problem in a two-echelon supply
chain as used in this paper. Our research is most related to that of [24]. The major differences between this research and
the study of [24] are as follows: (1) This research considers a supply chain where one manufacturer produces a product
and sells it to two retailers who are from two different areas with different economic development levels. However, Zhao
et al. [24] considered a supply chain with two competing manufacturers who produce two substitutable products and sell
them to one common retailer, respectively. (2) In this research, the retail service levels provided to the consumers are made
by the two retailers. However, in [24], the service levels provided to the consumers are directly made by the two competitive
manufacturers. (3) The manufacturer need decide the wholesale prices and the two retailers need decide the retail prices and
service levels in this study, however, the two competing manufacturer need decide the wholesale prices and service levels
and the common retailer only need decide the retail prices in [24].
In this paper, specically, we consider a two-echelon supply chain where a monopolistic manufacturer sells a product
through two retailers. The manufacturing cost, the customer demand and the retailers service cost coefcients are characterized as fuzzy variables. The manufacturer needs to decide their wholesale price, and the two retailers need to make their
retail price decisions and service level decisions. Our paper also focuses on the market power structures between the channel
members. Three decentralized decision models are established, i.e., Manufacturer-leader Stackelberg (MS) game model,
Retailer-leader Stackelberg (RS) game model and Vertical Nash (VN) game model. We assume that the two retailers have
equal market power, and they engage in Bertrand competition. The Manufacturer-leader Stackelberg game scenario represents a market, in which there is a larger manufacturer and two relatively smaller retailers, and the market is controlled by
the manufacturer who plays the role of Stackelberg-leader with respect to the two retailers. The Retailer-leader Stackelberg
game scenario arises in a market where the two retailers sizes are larger compared to the manufacturers, and the manufacturer acts as the follower. If neither the manufacturer nor the retailers possess a larger bargaining power in negotiations,
the supply chain interaction then follows a Vertical Nash game. Our main interest is to investigate how the monopolistic
manufacturer makes his wholesale pricing decisions, and how the two retailers make their retail pricing decisions and retail
service levels decisions when facing fuzzy uncertainty environments.
The rest of this paper is organized as follows. Section 2 briey introduces the notations and the problem formulation.
Section 3 gives and analyzes the three decentralized decision models. In Section 4, numerical examples are presented to
illustrate the effectiveness of the theoretical results, and to compare the analytical equilibrium solutions for prices, services,
and the maximal expected demands and prots under three scenarios. Section 5 summarizes our results and presents several
extensions for future research.
2. Problem description
In our two-echelon supply chain structure, there are one monopolistic manufacturer and two retailers. The manufacturer
produces a product with a manufacturing cost c, and wholesales it to two retailers (indexed by 1; 2) with wholesale prices w1
and w2 , respectively. We assume the two retailers are from two different areas with different economic development levels,
so the manufacturer adopts the differential wholesale prices. The retailer i sells the product to the end consumers with retail
price pi i 1; 2 and provides services directly to the consumers. We assume all activity occurs within a single period.
Moreover, the manufacturer and the two retailers have perfect information of the demands and the cost structures of other
channel members.
Consumer demand for the product is sensitive to two factors: retail prices and retail service levels. In dening the demand
function, we follow the approach by McGuire and Staelin [13]. The demand function is decreasing in its own price, but
increasing in the opponents price. Moreover, similar to [16,12], the demand for a product is increasing in its own service
level and decreasing in the opponents service level. The customer demand faced by retailer i can be described as

Di p1 ; p2 ; s1 ; s2 ai  bp pi cp pj bs si  cs sj ;

i 1; 2; j 3  i;

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J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

where the parameter ai represents the market base of the product sold by the retailer i, the parameters bp and cp are price
elastic coefcients, which measure the effectiveness of the retail prices in stimulating or restraining products consumer
demand, and the parameters bs and cs are service elastic coefcients, which measure the effectiveness of the retail services
in stimulating or restraining products consumer demand.
We assume that the cost of providing service has a decreasing return property, the next dollar invested would produce
less unit of service than the last dollar, i.e., it becomes more expensive to provide the next unit of service. This diminishing
return of service can be captured by the quadratic form of service cost. In our model, we assume that the cost of providing si
units of service is gi s2i =2, where gi is the service cost coefcient of retailer i; i 1; 2. This is similar to the function used in
[16,12].
Due to the innovation of products or market turbulence, the history data of the customers demand are not always
available or reliable. Therefore, quantitative demand forecasts and the estimates of manufacturing cost and service cost
coefcient based on decision makes judgements, intuitions and experience seem to be more appropriate. In this paper,
we assume the parameters c; ai ; bp ; cp ; bs ; cs and gi i 1; 2 are nonnegative and independent fuzzy variables. The parameters
bp ; bs and cp ; cs should satisfy Ebp  > Ecp  and Ebs  > Ecs , because the expected demand should be more sensitive to the
changes in its own retail price and service than to the changes in the rivals retail price and service.
The notations of this paper can be summarized as follows:
c: unit manufacturing cost of the product;
pi : unit retail price of the retailer i, which is the retailer is decision variable, satisfying pi > 0; i 1; 2;
wi : unit wholesale price of the product selling to the retailer, which is the manufacturers decision variable, satisfying
pi > wi ; i 1; 2;
si : the retailer is service level, which is the retailers decision variable, i 1; 2;
Di : consumer demand for the product selling by the retailer ii 1; 2, which is a function of p1 ; p2 ; s1 and s2 ;
ai : market base of products selling by the retailer i; i 1; 2;
gi : the retailer is service cost coefcient, i 1; 2;
pm : the manufacturers prot, which is a function of w1 and w2 ;
pri : the retailer is prot, which is a function of pi and si ; i 1; 2.
Each retailer chooses his own retail price and service level, and the manufacturer determines the wholesale prices. All
channel members try to maximize their own expected prot and behave as if they have perfect information of the demand
and the cost structure of other channel members.
According to the problem descriptions and assumptions, the prots of the two retailers and the manufacturer can be
expressed as follows

pri pi ; si pi  wi Di p1 ; p2 ; s1 ; s2  gi s2i =2; i 1; 2;

pm w1 ; w2 w1  cD1 p1 ; p2 ; s1 ; s2 w2  cD2 p1 ; p2 ; s1 ; s2 :

To ensure that the various prot expressions will be well behaved and possess a unique optimum, similar to [16], we
impose the following condition on the parameters: 2Ebp Egi   Ebs 2 > 0; C 11 < 0; C 11 C 22  C 12 C 21 > 0 and 4Ebp 2F 11 Ebs 
Egi   2Ebs  Ebp F 11 2 > 0, where i 1; 2; C 11 ; C 22 ; C 12 ; C 21 and F 11 are constants dened in Appendix A.

3. Main results
In this section, we follow a game-theoretical approach to analyze our model. Variation in the market power can create
one of the following three scenarios. The rst scenario is that there is a larger manufacturer and two relatively smaller retailers in the market, and the manufacturer acts as the Stackelberg leader. We establish the Manufacturer-leader Stackelberg
(MS) game model in this case. The second scenario is Retailer-leader Stackelberg where the two retailers sizes are larger
compared to the manufacturer, and the market is controlled by the retailers, we establish a Retailer-leader Stackelberg
(RS) game model in this scenario. The Vertical Nash (VN) game model is established in the scenario where every part in
the system has an equal bargaining power, so they simultaneously make their decisions. We will discuss these models in
more detail in the following sections.

3.1. MS game model

The manufacturer rst announces the wholesale prices of the product. After observing the wholesale prices, the two
retailers then set their own retail prices and service levels, simultaneously. The objective of each participant is to maximize
his own expected prot. The MS model can be formulated as follows:

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

8


max E pm w1 ; w2 ; p1 w1 ; w2 ; p2 w1 ; w2 ; s1 w1 ; w2 ; s2 w1 ; w2
>
>
>
w
;w

1
2
<
pi w1 ; w2 ; si w1 ; w2 ; i 1; 2 are derived from solving the problem
>
>
>
max Epr p ; si  i 1; 2:
:
i

pi ;si

583

The problem can be solved by backwards induction. We rst derive the reaction functions of the two retailers. The
Proposition 1 gives the results.
Proposition 1. In the MS model, given the wholesale prices w1 and w2 made earlier by the manufacturer, the two retailers
optimal retail prices and service levels are:

p1 w1 ; w2

B10 B11 w1 B12 w2

;
B

p2 w1 ; w2

B20 B21 w1 B22 w2

;
B

s1 w1 ; w2

Ebs 
B10 B11  Bw1 B12 w2 ;
BEg1 

s2 w1 ; w2

Ebs 
B20 B21 w1 B21  Bw2 ;
BEg2 

where B; B10 ; B11 ; B12 ; B20 ; B21 and B22 are dened in Appendix A.
The proof of Proposition 1 as well as the proofs of the other propositions, are given in Appendix B.
After knowing the retailers reaction functions, the two manufacturers would use them to maximize his own expected
prot by choosing the wholesale prices. The following proposition gives the closed form solution of manufacturers optimal
wholesale prices.
M
Proposition 2. In the MS model, the manufacturers optimal wholesale prices, denoted as wM
1 and w2 , are given as follows

wM
1

C 12 C 23  C 22 C 13
;
C 11 C 22  C 12 C 21

wM
2

C 13 C 21  C 23 C 11
;
C 11 C 22  C 12 C 21

10

where C 11 ; C 12 ; C 13 ; C 21 ; C 22 and C 23 are dened in Appendix A.

Proposition 3. In the MS model, the two retailers optimal retail prices and service levels are

pM
1

B10 B11 C 12 C 23  C 22 C 13 B12 C 13 C 21  C 23 C 11

;
BC 11 C 22  C 12 C 21
B

11

pM
2

B20 B21 C 12 C 23  C 22 C 13 B22 C 13 C 21  C 23 C 11

;
BC 11 C 22  C 12 C 21
B

12

sM
1



Ebs 
B11  BC 12 C 23  C 22 C 13 B12 C 13 C 21  C 23 C 11
;
B10
BEg1 
C 11 C 22  C 12 C 21

13

sM
2



Ebs 
B21 C 12 C 23  C 22 C 13 B21  BC 13 C 21  C 23 C 11
:
B20
BEg2 
C 11 C 22  C 12 C 21

14

The maximal expected prots of the manufacturer and the two retailers are

Z 1
2 



X
pM
M
M
3i
wM
Eai   Ebp pM
Ecp pM
 Ecs sM
Eccs sM
cLa cUpa cUa cLpa da
i
i
3i Ebs si
3i Ecbp pi
3i 
2 0
i1

Z 1
M Z 1

s
1
 i
15
cLa bUsa cUa bLsa da 
cLa aUia cUa aLia da ;
2 0
2 0

pM
m

M
M
pM
 wM
Ecp pM
 Ecs sM
Eai   Ebp pM
r i pi
i
i
3i Ebs si
3i  Egi 

sM
i
2

2
:

16

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J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

3.2. RS game model

In this case, the two retailers sizes are larger compared to the manufacturers. The two retailers act as the Stackelberg
leaders and simultaneously decide the retail prices and service levels to maximize their own expected prot, and then
the Stackelberg follower, i.e., the manufacturer, determines the wholesale prices to maximize his expected prot. The RS
model is formulated as

8


max E pri pi ; si ; w1 p1 ; p2 ; s1 ; s2 ; w2 p1 ; p2 ; s1 ; s2 i 1; 2
>
>
>
p
;s

i
i
<
w1 p1 ; p2 ; s1 ; s2 ; w2 p1 ; p2 ; s1 ; s2 are derived from solving the problem
>
>
>
max Epm w1 ; w2 
:

17

w1 ;w2

Similar game-theoretic framework as applied in the MS model is implemented to solve this problem. Given retail prices
and service levels, we rst derive the manufacturers response functions.
Proposition 4. In the RS model, for given retail prices p1 and p2 , service levels s1 and s2 , the manufacturers response functions are
formulated as

w1 p1 ; p2 ; s1 ; s2 p1 F 11 s1 F 12 s2 F 01 ;

18

w2 p1 ; p2 ; s1 ; s2 p2 F 12 s1 F 11 s2 F 02 ;

19

where F 01 ; F 02 ; F 11 and F 12 are dened in Appendix A.

Having the information about the response functions of the manufacturer, the two retailers would use them to maximize
their expected prots. The optimal retail prices and service levels of the two retailers can be derived as follows.
Proposition 5. In the RS model, the two retailers optimal retail prices and service levels are

pR
1

G1
;
G0

20

pR
2

G2
;
G0

21

sR
1

G3
;
G0

22

sR
2

G4
;
G0

23

where G0 ; G1 ; G2 ; G3 and G4 are dened in Appendix A.

Proposition 6. In the RS model, the manufacturers optimal wholesale prices are

wR
1

G1 F 11 G3 F 12 G4 F 01 G0
;
G0

24

wR
2

G2 F 12 G3 F 11 G4 F 02 G0
:
G0

25

3.3. VN game model

This scenario arises in a market in which there are relatively small to medium-sized manufacturers and retailers. It is
reasonable to assume that the manufacturer must condition his wholesale price decisions on the retail prices and the retail
services since he cannot dominate the market over the retailers. On the other hand, the retailer must also condition her retail
price and service decisions on the wholesale prices, since he cannot dominate the market over the manufacturer. In this case,
every rm has equal bargaining power and thus makes his decisions simultaneously, so the VN model can be formulated as
follows:

8
max Epm w1 ; w2 
< w
;w
1

: maxEpri pi ; si ;
pi ;si

i 1; 2

Solving the VN model, we can obtain the following results.

26

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J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

N
N
N
Proposition 7. In the VN model, the optimal retail prices pN
1 and p2 , the optimal service levels s1 and s2 chosen by the retailers,
N
and the optimal wholesale prices wN
and
w
chosen
by
the
manufacturer,
are
1
2

wN
1

I12 I23  I22 I13

;
I11 I22  I12 I21

27

wN
2

I13 I21  I23 I11

;
I11 I22  I12 I21

28

pN
1

B10 B11 I12 I23  I22 I13 B12 I13 I21  I23 I11

BI11 I22  I12 I21

B

29

pN
2

B20 B21 I12 I23  I22 I13 B22 I13 I21  I23 I11

;
BI11 I22  I12 I21
B

30

sN
1



Ebs 
B11  BI12 I23  I22 I13 B12 I13 I21  I23 I11
;
B10
BEg1 
I11 I22  I12 I21

31

sN
2



Ebs 
B21 I12 I23  I22 I13 B22  BI13 I21  I23 I11
;
B10
BEg2 
I11 I22  I12 I21

32

where I11 ; I12 ; I13 ; I21 ; I22 and I23 are dened in Appendix A.
4. Numerical studies
Because the optimal decisions obtained in this paper are in a very complicated form, we have to use numerical studies to
compare the results obtained from the above three different decision models and to explore the channel members behaviors
facing changing environments. Furthermore, the effects of the fuzzy degrees of parameters on the optimal prices, optimal
service levels, maximal expected prots and maximal expected demands are analyzed.
The relationship between the linguistic expressions and triangular fuzzy variables for the manufacturing cost, market
bases, price elasticity coefcients, service elastic coefcients and service cost coefcients are often determined by experts
experiences (see Table 1).
4.1. Discussion 1
Consider the case where the manufacturing cost c is high (c is about 7), the market bases a1 and a2 are large (a1 is about
3000, a2 is about 3500), service cost coefcients g1 and g2 are sensitive (g1 is about 160, g2 is about 120), price elastic
Table 1
Relation between linguistic expression and triangular fuzzy variable.
Linguistic expression

Triangular fuzzy variable

Manufacturing cost c

Low (about 3)
Medium (about 5)
High (about 7)

(2, 3, 4)
(4, 5, 6)
(6, 7, 8)

Market base a1

Large (about 3000)

Small (about 2000)

(2960, 3000, 3040)

(1960, 2000, 2040)

Market base a2

Large (about 3500)

Small (about 2500)

(3460, 3500, 3540)

(2460, 2500, 2540)

Price elasticity bp

Very sensitive (about 300)

Sensitive (about 200)

(270, 300, 330)

(170, 200, 230)

Price elasticity cp

Very sensitive (about 250)

Sensitive (about 150)

(220, 250, 280)

(120, 150, 180)

Service elasticity bs

Very sensitive (about 250)

Sensitive (about 150)

(220, 250, 280)

(120, 150, 180)

Service elasticity cs

Very sensitive (about 200)

Sensitive (about 100)

(170, 200, 230)

(70, 100, 130)

Service cost coefcient g1

Very sensitive (about 180)

Sensitive (about 160)

(175, 180, 185)

(150, 160, 170)

Service cost coefcient g2

Very sensitive (about 150)

Sensitive (about 120)

(130, 150, 170)

(105, 120, 135)

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J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

Table 2
The maximal expected prots and maximal expected demands.
Scenario

EPm 

EPr1 

EPr2 

EPr1  EPr2 

ED1 

ED2 

MS
RS
VN

89155
67971
89010

4249
11835
4960

8986
15759
7553

13235
27594
12513

1144.8
1165.8
1236.8

1839.3
1379.7
1686.2

Table 3
The optimal decisions of retail prices, service levels and wholesale prices.
Scenario

p1

p2

s1

s2

w1

w2

MS
RS
VN

41.68
44.21
42.17

45.50
46.96
45.70

5.37
4.68
5.80

11.50
7.39
10.54

35.95
32.55
35.99

36.30
33.16
37.27

coefcients bp and cp are sensitive (bp is about 200, cp is about 150), service elastic coefcients bs and cs are sensitive (bs is
about 150, cs is about 100). Using Table 1, c 6; 7; 8; a1 2960; 3000; 3040; a2 3460; 3500; 3540; g1 150;
160; 170; g2 105; 120; 135; bp 170; 200; 230; cp 120; 150; 180; bs 120; 150; 180; cs 70; 100; 130.
Following from Denition 5 of [25], the a-optimistic values and a-pessimistic values of c, ai ; bp ; cp ; bs ; cs and gi (i 1; 2)
are as follows.

cLa 6 a; aL1a 2960 40a; aL2a 3460 40a; bLpa 170 30a; cLpa 120 30a;
bLsa 120 30a; cLsa 70 30a; gL1a 150 10a; gL2a 105 15a;
cUa 8  a; aU1a 3040  40a; aU2a 3540  40a; bUpa 230  30a; cUpa 180  30a;
bUsa 180  30a; cUsa 130  30a; gU1a 170  10a; gU2a 135  15a:
The expected values are Ea1  2960230003040
3000; Ea2 
4
1202150180
4

150; Ebs 

1202150180
4

150; Ecs 

702100130
4

3460235003540
4

3500; Ebp 

100; Eg1 

1502160170
4

1702200230
4

200; Ecp 

160; Eg2  1052120135

4

120, Ecbp  1410; Eccs  710.

The corresponding results are shown as in Tables 2 and 3.
From Tables 2 and 3, we can obtain the following insights.
(1.1) The rm who is the leader in supply chain has the advantage to get the higher expected prots. For example, the
manufacturers expected prot under MS model is the highest, while the two retailers have their own maximal
expected prots under RS model.
(1.2) Under the three game models, the optimal wholesale price w2 > w1 , the prot margin p2  w2 > p1  w1 , and the
maximal expected demands ED2  > ED1 . This is because Ea2  > Ea1 .
(1.3) Regardless of what kind of power structure, the retailer 2s optimal retail price and service level are always higher
than retailer 1s. This is because the retailer 2 has an advantage on the market base of the product and service cost
coefcient (i.e., Ea2  > Ea1 ; Eg1  > Eg2 ). This results in the retailer 2 gets a higher maximal expected prot than
the retailer 1.
4.2. Discussion 2
In this discussion, we assume that the two retailers do not provide the service to the end consumers,i.e.
bs cs 0; g1 g2 0 in the corresponding models. The computation results are shown as in Tables 4 and 5.
M
N
R
R
N
M
N
M
From Tables 4 and 5, we can see pM
pR
> wN
> wR
i
i > pi ; wi
i
i ; Epm  > Epm  > Epm  , Epr i  > Epr i  > Epr i  ,

EDi N > EDi M EDi R i 1; 2. The results are consistent with what have been obtained by Zhao et al. [25].

Table 4
The maximal expected prots and maximal expected demands without retailers services.
Scenario

EPm 

EPr1 

EPr2 

EPr1  EPr2 

ED1 

ED2 

MS
RS
NG

67309
54018
66585

6122
12244
7361

7170
14339
9068

13292
26583
16429

1106.5
1106.5
1213.3

1197.5
1197.5
1346.7

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J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

Table 5
The optimal decisions of retail prices and wholesale prices without retailers services.
Scenario

p1

p2

w1

w2

MS
RS
NG

41.38
41.38
38.88

42.54
42.54
39.92

35.84
30.31
32.81

36.23
30.57
33.19

Table 6
The change of maximal expected prots and demands with the fuzzy degree of bs .
Scenario

bs

Epm 

MS

(120,150,180)
(130,150,170)
(140,150,160)
(145,150,155)

89155
89099
89043
89014

RS

(120,150,180)
(130,150,170)
(140,150,160)
(145,150,155)

67971
67931
67891
67871

Epr1 

Epr2 

4249.0
4248.8
4248.4
4248.0
11835
11835
11835
11835

ED1 

ED2 

8986
8977
8968
8964

1144.80
1144.75
1144.70
1144.60

1839.3
1838.4
1837.5
1837.1

15759
15759
15759
15759

1165.8
1165.8
1165.8
1165.8

1379.7
1379.7
1379.7
1379.7

Table 7
The change of optimal decisions with the fuzzy degree of bs .
Scenario

bs

p1

p2

w1

w2

s1

s2

MS

(120,150,180)
(130,150,170)
(140,150,160)
(145,150,155)

41.6785
41.6859
41.6932
41.6969

45.5009
45.5069
45.5128
45.5158

35.9544
35.9621
35.9698
35.9737

36.3044
36.3148
36.3252
36.3304

5.3664
5.3660
5.3657
5.3655

11.4957
11.4901
11.4845
11.4817

RS

(120,150,180)
(130,150,170)
(140,150,160)
(145,150,155)

44.2070
44.2070
44.2070
44.2070

46.9582
46.9582
46.9582
46.9582

32.5494
32.5494
32.5494
32.5494

33.1608
33.1608
33.1608
33.1608

4.6839
4.6839
4.6839
4.6839

7.3915
7.3915
7.3915
7.3915

Compared with Tables 2 and 3, we nd the following results.

(2.1) Regardless of what kind of power structure, when the two retailers provide services for consumers, the optimal prices
will increase, and the maximal expected demands will increase. This results in the increase of the manufacturers maximal expected prot.
(2.2) When the two retailers provide services for consumers, the maximal expected prot of retailer 1 will decrease,
whereas the maximal expected prot of retailer 2 will increase. This is because the service cost coefcient of retailer
1 is bigger than that of retailer 2.
4.3. Discussion 3
Now we change the fuzzy degree of parameter bs and analyze its effect on the optimal prices, optimal service levels, maximal expected prots and maximal expected demands in MS and RS games. The other parameters are as follows:
c 6; 7; 8; a1 2960; 3000; 3040; a2 3460; 3500; 3540; bp 170; 200; 230; cp 120; 150; 180; cs 70; 100; 130;
g1 150; 160; 170 and g1 105; 120; 135. The corresponding results are shown as in Tables 6 and 7.
From Tables 6 and 7, we can obtain the following results.
(3.1) In MS game scenario, with decreasing fuzzy degree of parameter bs , the optimal retail prices and the optimal wholesale prices slightly increase, whereas the optimal service levels, the maximal expected demands and the maximal
expected prots slightly decrease.
(3.2) In RS game scenario, the maximal expected prot of the manufacturer decreases with decreasing fuzzy degree of
parameter bs , this is consistent with MS game case. Different from MS game case, with decreasing fuzzy degree of
parameter bs , the optimal prices, the optimal service levels, the maximal expected demands and the maximal expected
prots of the two retailers are unchanged.
Similarly, we can also discuss the effects of the other parameters fuzzy degrees on the equilibrium solutions, such as
service elastic coefcient cs , the market bases a1 and a2 , and so on.

588

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

5. Conclusions
This paper studies the pricing and retailers service decisions in a fuzzy supply chain where two retailers buy a product
from one monopolistic manufacturer, and in turn sell it to the end consumers. Unlike others studies, our work makes contribution on three aspects. Firstly, we consider the retailers service decision and service competition. Secondly, we consider
the fuzzy uncertainty environments and characterize the consumer demands, manufacturing costs and two retailers service
cost coefcients as fuzzy variables. Thirdly, we study three possible scenarios for the strategic interactions between one
manufacturer and two retailers. By using game-theoretic approach, the corresponding analytical equilibrium solutions for
three models (MS, RS, VN) are obtained. Through numerical analysis, we compare analytical equilibrium solutions for the
maximal expected prots, the maximal expected demands, the optimal pricing and service level decisions under three decision scenarios, and study the behavior of rms facing changing fuzzy uncertainty environments. We also discuss the effects
of the fuzzy degrees of parameters on the equilibrium solutions. There are some possible extensions to improve our models,
for example, the supply chain coordination under the decentralized decision cases and the decision model with nonlinear
demand can be studied in the future.

Acknowledgments
The authors wish to express their sincerest thanks to the editors and anonymous referees for their constructive comments
and suggestions on the paper. We gratefully acknowledge the support of National Natural Science Foundation of China, Nos.
71371186, 71301116, and 71001106.

Appendix A

Ebs Ecs 
Ecp  
Eg1 

B10 Ea1 

B11

B12

!
!


Ebs Ecs 
E2 bs 
E2 bs 
Ecp  

 2Ebp 
 2Ebp  ;
Eg2 
Eg1 
Eg2 

!


E2 bs 
Ebs Ecs 
;
 2Ebp   Ea2  Ecp  
Eg2 
Eg2 

Ebp  

!
!


E2 bs 
E2 bs 
Ebs Ecs 
Ebs Ecs 
;
Ecp  
 2Ebp  
Eg1 
Eg2 
Eg1 
Eg2 

!
!

Ebs Ecs  E2 bs 
E2 bs 
Ebs Ecs 
Ecp  
;
 2Ebp   Ebp  
Eg2 
Eg2 
Eg2 
Eg2 

B20

!


E2 bs 
Ebs Ecs 
;
Ea2 
 2Ebp   Ea1  Ecp  
Eg1 
Eg1 

B21

!
!

Ebs Ecs  E2 bs 
E2 bs 
Ebs Ecs 
Ecp  
;

 2Ebp   Ebp  
Eg1 
Eg1 
Eg1 
Eg1 

!
!


E2 bs 
E2 bs 
Ebs Ecs 
Ebs Ecs 
;
B22 Ebp  
Ecp  
 2Ebp  
Eg2 
Eg1 
Eg2 
Eg1 
!
B21 Ecp  B11 Ebp  E2 bs B11  B Ebs Ecs B21

C 11 2


;
B
BEg1 
BEg2 
B




B22 B11 Ecp  B12 B21 Ebp  E2 bs  B12
B21
Ebs Ecs  B22  B B11  B

;


C 12 C 21
B
B
B
Eg2 
Eg1 
Eg1  Eg2 
B


B20 Ecp  B10 Ebp  B10 E2 bs  B20 Ebs Ecs  Ebs Eccs  B11  B
B21
C 13 Ea1 


B
BEg1 
BEg2 
B
Eg1 
Eg2 
B

Z 1
Z 1

L U

B11 B21 Ecbp  B11 B21

1 Ebs B11  B Ebs B21

cLa cUpa cUa cLpa da 
ca bsa cUa bLsa da;

2
BE
2B
g

BE
g

B
0
0
1
2

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

C 22 2

!
B12 Ecp  B22 Ebp  E2 bs B22  B Ebs Ecs B12
;



B
BEg2 
BEg1 
B



B10 Ecp  B20 Ebp  B20 E2 bs  B20 Ebs Ecs  Ebs Eccs  B12
B22  B


B
B
BEg2 
BEg1 
B
Eg2 
Eg1 

Z 1
Z 1

L U

B12 B22 Ecbp  B12 B22

1 Ebs B12 Ebs B22  B

cLa cUpa cUa cLpa da 
ca bsa cUa bLsa da;

2 BEg1 
BEg2 
2B
B
0
0

C 23 Ea2 

F 11
F 01
F 02

Ebs Ebp   Ecs Ecp 

2

E bp   E cp 

F 12

Ebs Ecp   Ecs Ebp 

;
E2 bp   E2 cp 
R1
Ea1 Ebp  Ea2 Ecp  Ecbp   12 0 cLa cUpa cUa cLpa daEbp  Ecp 
2

E2 bp   E2 cp 
R1
Ea1 Ecp  Ea2 Ebp  Ecbp   12 0 cLa cUpa cUa cLpa daEbp  Ecp 
E2 bp   E2 cp 

G01 2Ea1  F 01 Ebp ;

G03 F 11 Ea1   F 01 Ebs ;

G02 2Ea2  F 02 Ebp ;

G04 F 11 Ea2   F 02 Ebs ;

G11 4Ebp ;
G12 2Ecp ;

G13 2Ebs  F 11 Ebp ;

G14 F 12 Ebp   2Ecs ;

G22 F 11 Ecp ;

G23 2F 11 Ebs   Eg1 ;

G24 F 11 Ecs   F 12 Ebs ;

G33 2F 11 Ebs   Eg2 ;



 G01 G12 G13 G14 


 G
G11 G14 G13 
02

G1 
;
 G03 G22 G23 G24 


 G
G13 G24 G33 
04


 G11 G12 G01 G14 



G
 12 G11 G02 G13 
G3 
;
 G13 G22 G03 G24 


G
G13 G04 G33 
22


 G11 G12 G13 G14 



G
 12 G11 G14 G13 
G0 
;
 G13 G22 G23 G24 


G
G
G
G 
22

13

24


 G11

G
 12
G2 
 G13

G
22

 G11

G
 12
G4 
 G13

G
22


G14 

G02 G14 G13 
;
G03 G23 G24 
G04 G24 G33 

G12 G13 G01 

G11 G14 G02 
;
G22 G23 G03 
G13 G24 G04 
G01

33

I11

F 11 Ebs B11  B F 12 Ebs B21

 B  B11 ;
Eg1 
Eg2 

I12

F 11 Ebs B12 F 12 Ebs B22  B

 B12 ;
Eg2 
Eg1 

I13

F 11 Ebs B10 F 12 Ebs B20

BF 01  B10 ;
Eg1 
Eg2 

I21

F 12 Ebs B11  B F 11 Ebs B21

 B21 ;
Eg1 
Eg2 

I22

F 12 Ebs B12 F 11 Ebs B22  B

 B  B22 ;
Eg2 
Eg1 

I23

F 12 Ebs B10 F 11 Ebs B20

BF 02  B20 :
Eg1 
Eg2 

G13

589

590

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

Appendix B
Proof of Proposition 1. It follows from Eqs. (1) and (2), together with Lemmas 35 of [25], that

Epri pi ; si  pi  wi Eai   Ebp pi Ecp pj Ebs si  Ecs sj  Egi 

s2i
;
2

i 1; 2; j 3  i:

33

The rst-order and second-order partial derivatives of with respect to pi and si can be shown as

@Epri p1 ; p2 ; s1 ; s2 
Eai   2Ebp pi Ecp pj Ebs si  Ecs sj wi Ebp 
@pi

34

@Epri pi ; si 
pi  wi Ebs   Egi si ;
@si

35

@ 2 Epri pi ; si 
2Ebp ;
@p2i

36

@ 2 Epri pi ; si  @ 2 Epri p1 ; p2 ; s1 ; s2 

Ebs ;
@pi @si
@si @pi

37

@ 2 Epri pi ; si 
Egi :
@s2i
It follows from Eqs. (36)(38) and 2Ebp Egi   Ebs 2 > 0 that the Hessian matrix H

38


2Ebp 
Ebs 

Ebs 
is negative denite.
Egi 

Thus, the expected prot Epri pi ; si  of retailer i is concave to pi and si . Setting Eqs. (34) and (35) to zero and solving them
simultaneously, we obtain Eqs. (5)(8). Thus Proposition 1 holds.
Proof of Proposition 2. By substituting Eqs. (5)(8) into Eq. (3), the expected prot Epm  (as a shorthand for
Epm w1 ; w2 ; p1 w1 ; w2 ; p2 w1 ; w2 ; s1 w1 ; w2 ) can be expressed as:

Epm 



B10 B20 Ecbp  Ebs Eccs  B10
C 11 2
C 22 2
B20
w1 C 12 w1 w2
w2 C 13 w1 C 23 w2

B
2
2
Eg1  Eg2 
B
Z 1
Z 1




1
B10 B20

cLa aU1a aU2a cUa aL1a aL2a da 
cLa cUpa cUa cLpa da
2 0
2B
0

Z 1
L U

1 B10 Ebs  B20 Ebs 


ca bsa cUa bLsa da;

2 BEg1 
BEg2 
0

39

The rst-order partial derivatives of Epm  with respect to w1 and w2 can be shown as

@Epm 
C 11 w1 C 12 w2 C 13 ;
@w1

40

@Epm 
C 21 w1 C 22 w2 C 23 :
@w2

41

It follows from Eqs. (40) and (41), and assumptions C 11 < 0; C 11 C 22  C 12 C 21 > 0, that the expected prot Epm  is a concave function of w1 and w2 . By setting Eqs. (40) and (41) to zero and solving for w1 and w2 , the optimal wholesale prices wM
1
and wM
2 can be obtained.
M
Proof of Proposition 3. By substituting wM
1 and w2 into Eqs. (2), (3) and (6)(9), Proposition 3 can be obtained.

Proof of Proposition 4. By using Eqs. (1) and (3), together with Lemma 35 of [25], Epm w1 ; w2  can be expressed as





Epm w1 ; w2  Ea1   Ebp p1 Ecp p2 Ebs s1  Ecs s2 w1 Ea2   Ebp p2 Ecp p1 Ebs s1  Ecs s2 w2
Ecbp p1 p2 Eccs s1 s2
Z


i
1 1 h L U

ca a1a aU2a cUpa p1 p2 bUsa s1 s2 cUa aL1a aL2a cLpa p1 p2 bLsa s1 s2 da:
2 0
42

591

J. Zhao, L. Wang / Applied Mathematics and Computation 250 (2015) 580592

Letting and substituting pi wi t i ; t i > 0 into Eq. (42), the rst-order partial derivatives are given as

@Epm w1 ; w2 
1
Ea1   Ebp p1 Ecp p2 Ebs s1  Ecs s2  Ebp w1 Ecp w2 Ecbp  
@w1
2



cLa cUpa cUa cLpa da;
43

@Epm w1 ; w2 
1
Ea2   Ebp p2 Ecp p1 Ebs s2  Ecs s1  Ebp w2 Ecp w1 Ecbp  
@w2
2


2Ebp 
It follows from Eqs. (43) and (44) that the Hessian matrix H
2Ecp 

Z
0



cLa cUpa cUa cLpa da:
44


2Ecp 
. It is negative denite since Ebp  > 0 and
2Ebp 

Ebp  > Ecp . So, Epm w1 ; w2  is concave with respect to w1 and w2 . By setting Eqs. (43) and (44) to zero and solving them
simultaneously, Eqs. (18) and (19) can be obtained.
Proof of Proposition 5. It follows from Eqs. (1), (2), (18) and (19) that






s2
E pri pi ;si ;w1 p1 ;p2 ;s1 ;s2 ;w2 p1 ;p2 ;s1 ;s2 2pi  F 11 si  F 12 sj  F 0i Eai   Ebp pi Ecp pj Ebs si  Ecs sj  Egi  i :
2
45
From Eq. (45), the rst-order partial derivatives of Epri pi ; si ; w1 p1 ; p2 ; s1 ; s2 ; w2 p1 ; p2 ; s1 ; s2  with respect to pi and si


@Epr 
Epr 
abbreviated as @pi i and @sii can be shown as

@Epri 
4Ebp pi 2Ecp pj 2Ebs  Ebp F 11 si Ebp F 12  2Ecs sj 2Eai  F 0i Ebp ;
@pi

46

@Epri 
2Ebs  Ebp F 11 pi  F 11 Ecp pj  2F 11 Ebs  Egi si F 11 Ecs   F 12 Ebs sj  F 11 Eai  F 0i Ebs :
@si

47

From Eqs. (46) and (47) and the assumption 4Ebp 2F 11 Ebs  Egi   2Ebs  Ebp F 11 2 > 0, we can prove that the
expected prot Epri pi ; si ; w1 p1 ; p2 ; s1 ; s2 ; w2 p1 ; p2 ; s1 ; s2  is a concave function of pi and si . By setting Eqs. (46) and (47)
R
to zero and solving for pi and si , the optimal retail price pR
i and the optimal service level si can be obtained.
Proof of Proposition 6. By Propositions 4 and 5, we can easily see that Proposition 6 holds.
Proof of Proposition 7. Consider that the decisions for the two retailers and the manufacturer are already derived in the MS
model and the RS model respectively. The two retailers reaction functions for given wholesale prices are Eqs. (5)(8), and the
manufacturer reaction functions for given retail prices and service levels are Eqs. (18) and (19).
Solving these equations simultaneously yields the Vertical Nash equilibrium solutions. The equilibrium solutions can be
derived as Eqs. (27)(32).
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