Topological rationality of supply chain networks

Abstract

In this study, we apply a topologically distributed bounded rationality model to quantify the level of rationality in supply chain networks. We use the averaged Jensen-Shannon divergence values between Nash and Quantal Response equilibria for all inter-firm strategic interactions, which are represented as Prisoner’s Dilemma games, to characterise the average level of rationality in a given supply chain network. This is based on the game theoretic assumption that as the rationality of a particular interaction increases, it converges towards Nash equilibrium, in a certain strategic decision making scenario. Using this model, we demonstrate that hub-and-spoke topologies are collectively more rational compared to scale-free and random network topologies. Finally, we compare our theoretical results against the empirical findings reported for networked systems in various domains. In particular, it is shown that network topologies comprising higher average rationality levels emerge under increasingly competitive environments.