Managing the misbehaving retailer under demand uncertainty and imperfect information

Abstract

Incorporation of behavioral decision-making theory into supply chain contracts has been in vogue for the last few years. However, most studies consider only one contract type at a time. We consider a scenario wherein a rational supplier sells perishable goods to a boundedly rational retailer experiencing random market demand. Contrary to previous literature, choice is available between two contract types: buyback and revenue sharing. Using a mental accounting-based utility structure for the boundedly rational retailer; we develop contract preference profiles for both the retailer and the supplier. We further examine the region of consensus between the players to arrive at situations in which empowering the boundedly rational retailer to choose the contract type might potentially improve the supply chain performance. Our results are relevant to large consumer goods companies dealing with a highly fragmented and heterogeneous retailer base.