BI-LEVEL STRUCTURE MODEL
In the Bi-level structure, the manufacturer (upper level) does not know the retailer’s (lower level) response when making decisions; however, the retailer’s order quantity would be used to control the optimal sharing rate that results the maximum profit. Knowing this information, the retailer would then respond to the manufacturer regarding their optimal Q. Continuing this negotiation-like process, a Nash equilibrium will be obtained between the two decision makers. However, in reality, the decision maker is often faced with a dilemma, i.e. not all situations are guaranteed to achieve a dominant equilibrium strategy. The Nash equilibrium is a sub-level alternative scheme. Each decision maker may not be willing to deviate from the current equilibrium. During this negotiation, both parties affect each other’s decisions until they achieve their optimal profit. The process flow under a Bi-level structure is presented by Figure 2