Transshipment prices and pair-wise stability in coordinating the decentralized transshipment problem

The decentralized transshipment problem is a two-stage decision making problem where the companies first choose their individual production levels in anticipation of random demands and after demand realizations they pool residuals via transshipment. The coordination will be achieved if at optimality all the decision variables, i.e. production levels and transshipment patterns, in the decentralized system are the same as those of centralized system. In this paper, we study the coordination via transshipment prices. We propose a procedure for deriving the transshipment prices based on the coordinating allocation rule introduced by Anupindi et al. [1]. With the transshipment prices being set, the companies are free to match their residuals based on their individual preferences. We draw upon the concept of pair-wise stability to capture the dynamics of corresponding matching process. As the main result of this paper, we show that with the derived transshipment prices, the optimum transshipment patterns are always pair-wise stable, i.e. there are no pairs of companies that can be jointly better off by unilaterally deviating from the optimum transshipment patterns.