Abstract
This paper investigates optimal price and quality decisions of a manufacturer-retailer supply chain under demand uncertainty, in which players are both risk-averse decision makers. The manufacturer determines the wholesale price and quality of the product, and the retailer determines the retail price. By means of game theory, we employ the constant absolute risk aversion (CARA) function to analyze two different supply chain structures, that is, manufacturer Stackelberg model (MS) and retailer Stackelberg model (RS). We then analyze the results to explore the effects of risk aversion of the manufacturer and the retailer upon the equilibrium decisions. Our results imply that both the risk aversion of the manufacturer and the retailer play an important role in the price and quality decisions. We find that, in general, in MS and RS models, the optimal wholesale price and quality decrease with the risk aversion of the manufacturer but increase with the risk aversion of the retailer, while the retail price decreases with the risk aversion of the manufacturer as well as the retailer. We also examine the impact of quality cost coefficient on the optimal decisions. Finally, numerical examples are presented to illustrate the different degree of effects of players’ risk aversion on equilibrium results and to compare results in different models considered.
Highlights
Over the last couple of decades, the business environment has evolved to be increasingly complex that is characterized by high uncertainty and rapid and frequent changes
Motivated by the real business practice, in this paper, we analyze the optimal decisions of risk-averse players via the constant absolute risk aversion (CARA) utility function
Our analytical results reveal the following findings. (i) In general, in manufacturer Stackelberg model (MS) and retailer Stackelberg model (RS), the optimal wholesale price and quality decrease with the risk aversion of the manufacturer but increase with the risk aversion of the retailer, while the retail price decreases with the risk aversion of the manufacturer as well as the retailer. (ii) The results indicate that the wholesale price, quality, and retail price all decrease with the quality cost coefficient. (iii) The two players’ risk aversion has different degree of effects on the equilibrium results
Summary
Over the last couple of decades, the business environment has evolved to be increasingly complex that is characterized by high uncertainty and rapid and frequent changes. The literature dealing with both pricing and quality investment for riskaversion players is sparse, with the exception of Xie et al [13] They investigated the impact of various supply chain strategies and risk-averse behaviors of the players on quality investment and price decision in a supplier-manufacturer supply chain with uncertain demand. They only illustrated the impact of the manufacturer’s risk tolerance on players’ equilibrium decisions. We derive the optimal price and quality decisions of a manufacturer-retailer supply chain under demand uncertainty, in which players are both risk-averse decision makers, and examine how risk aversion affects the equilibrium results.
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