Supply Networks as a Complex Adaptive System: Toward Simulation-Based Theory Building on Evolutionary Decision Making

In this article, we examine how the firms embedded in supply networks engage in decision making over time. The supply networks as a complex adaptive system are simulated using cellular automata (CA) through a dynamic evolution of cooperation (i.e., "voice" decision) and defection (i.e., "exit" decision) among supply network agents (i.e., firms). Simple local rules of interaction among firms generate complex patterns of cooperation and defection decisions in the supply network. The incentive schemes underlying decision making are derived through different configurations of the payoff-matrix based on the game theory argument. The prisoner's dilemma game allows capturing the localized decision-making process by rational agents, and the CA model allows the self-organizing outcome to emerge. By observing the evolution of decision making by cooperating and defecting agents, we offer testable propositions regarding relationship development and distributed nature of governance mechanisms for managing supply networks.