Performance in the supply chain with a loss-averse retailer with random demand

Abstract

We investigates a two-echelon supply chain with one risk-natural supplier and one loss-averse retailer where there is one short life cycles product with stochastic demand. The loss-averse preference is adopted to describe the retailer's decision-making behavior. We introduce a combined contract by organically combining the quantity flexibility contract and the buy-back contract with this issue. It is found that the risk averse retailer's optimal order quantity is less than the risk-neutral retailer's and decreasing with the risk aversion level. When designed properly, the combined contract can be used to reduce the loss-aversion effect. Moreover, the effects of retailer's risk preference on agents' decision-making and profit allocation are studied. Comparing with quantity flexibility contract and buy-back contract, to some extent, the combined contract can make supply chain more efficient in terms of coordination and profit allocation. The numerical experiments are conducted to validate our theoretical results.