Robust coordination of supply chain with loss aversion

Abstract

This paper considers a supply chain consisting of a risk-neutral supplier and a loss-averse retailer under limited distributional information of demand. The robust approach is applied to deal with the integrated decision model and the decentralized decision model when only the mean and variance of demand distribution is assumed to be known. A combined buy-back and loss-sharing contract (BL contract) is designed to coordinate the supply chain and arbitrarily allocate the expected profit between two sides of the supply chain. Specially, the explicit expression of the unique buy-back credit that can coordinate the supply chain is provided when the loss-sharing fraction equals to the reciprocal of the loss aversion degree. Several numerical experiments are performed to illustrate the effects of parameters on the decision.