Loss-averse supply chain decisions with a capital constrained retailer

Abstract

<p style='text-indent:20px;'>In real-world transactions, capital constraints restrict the rapid development of the enterprises in the supply chain. The loss aversion behaviors of enterprises directly affect the decision making. This paper investigates the optimal decisions of both the supplier and the capital constrained retailer being loss aversion decision makers under different financing strategies. The capital constrained retailer may borrow from a bank or use the supplier's trade credit to satisfy uncertain demand. With a wholesale price contract, we analytically solve the unique Stackelberg equilibrium under two financing schemes. We derive the critical wholesale price that determines the retailer's financing preference. We identify the impacts of the loss aversion coefficients and initial capital level on the operational and financing decisions. Numerical examples reveal that there exists a Pareto improvement zone regarding the retailer's loss aversion coefficient and initial capital level.