Service Commitment Strategy and Pricing Decisions in Retail Supply Chains with Risk-Averse Players

Abstract

We study the service commitment strategy and pricing decisions in a single-supplier single-retailer supply chain where all the players (and consumers) are risk averse. Motivated by various industrial practices, we explore the case where the retailer determines whether to provide a service guarantee (SG) or to provide no service guarantee (NSG). The main incentive for using SG is to reduce the service-level risk to consumers. We derive the range of the supplier's degree of risk aversion and the range of the consumer's sensitivity (or attitude) to service reliability over which the retailer chooses SG. We find that (i) the retailer's motivation to use SG increases with the consumer's product quality perception, (ii) the retailer's motivation to use SG decreases with the retailer's degree of risk aversion but increases with both the consumer's degree of risk aversion and the retailer's service investment efficiency, and (iii) the unit wholesale price under NSG is lower than that under SG if and only if the consumer's service-level sensitivity is sufficiently small. In addition, we illustrate that the endogenization of unit wholesale price raises the retailer's motivation to use SG if the consumer is sufficiently risk averse; otherwise, it may decrease this motivation. In the make-to-stock mode, we also find that a higher unit-holding cost weakens the retailer's motivation to use an availability guarantee.