Pareto-improving agreements

One possible goal for cxjordination agreements is to generate Pareto-improving performance, i.e., no party to the agreement is worse off and at least one is strictly better off. 

Notice that this agreement also generates a Pareto-improving contract. Also, because the supply chain profit attains the maximum possible level, the agreement coordinates the supply chain. As before, any of the different w and p combinations correspond to the different possible splits of the total supply chain pie of profits. Details regarding the negotiations to split increased profits will be left out of this discussion. 

The key message is that in many supply chain contexts coordinating agreements can deliver significant improvements that all involve expanding the supply chain profit pie, thus enabling Pareto-improving profit situations. 

The results show that the agreement between Quick and Smart results in an increase in expected profit for Quick from 0 to 40 and a decrease in expected costs for Smart from 570 to 540. Thus, in this example, both Quick and Smart improve their performance and Smarts service level from Quick increases from 80% to 100%. Such an agreement can be considered to be Pareto improving. 

It is clear that since the retailer-expected profits increase while the manufacturer revenues decrease, manufacturer profits decrease (if costs were to remain the same). Thus QR is not Pareto improving without coordination agreements. This su ests the need for agreements between the manufacturer and the retailer to implement QR. 

Thus the manufacturer and the retailer are better off with this agreement than in the original system because it is Pareto improving. 

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