Production-inventory games: A new class of totally balanced combinatorial optimization games

In this paper we introduce a new class of cooperative games that arise from production-inventory problems. Several agents have to cover their demand over a finite time horizon and shortages are allowed. Each agent has its own unit production, inventory-holding and backlogging cost. Cooperation among agents is given by sharing production processes and warehouse facilities: agents in a coalition produce with the cheapest production cost and store with the cheapest inventory cost. We prove that the resulting cooperative game is totally balanced and the Owen set reduces to a singleton: the Owen point. Based on this type of allocation we find a population monotonic allocation scheme for this class of games. Finally, we point out the relationship of the Owen point with other well-known allocation rules such as the nucleolus and the Shapley value. © 2007 Elsevier Inc. All rights reserved. JEL classification: C71