Supply Chain Coordination with a Loss-Averse Retailer and Combined Contract

• Main Authors: Wei Liu, Shiji Song, Ying Qiao, Han Zhao
• Format: Article
• Language: English
• Published: MDPI AG 2020-04-01
• Series: Mathematics
• Subjects: loss aversion; Conditional Value-at-Risk; supply chain coordination; contract design
• Online Access: https://www.mdpi.com/2227-7390/8/4/586

This paper studies the supply chain coordination where the retailer is loss-averse, and a combined buyback and quantity flexibility contract is introduced. The loss-averse retailer’s objective is to maximize the Conditional Value-at-Risk of utility. It is shown the combined contract can coordinate the chain and a unique coordinating wholesale price exists if the confidence level is below a threshold. Moreover, the retailer’s optimal order quantity, expected utility and coordinating wholesale price are decreasing in loss aversion and confidence levels, respectively. We also find that when the contract parameters are restricted, the combined contract may coordinate the supply chain even though neither of its component contracts coordinate the chain.