Abstract
This paper studies the supply chain coordination where the retailer is loss-averse, and a combined buyback and quantity flexibility contract is introduced. The loss-averse retailer’s objective is to maximize the Conditional Value-at-Risk of utility. It is shown the combined contract can coordinate the chain and a unique coordinating wholesale price exists if the confidence level is below a threshold. Moreover, the retailer’s optimal order quantity, expected utility and coordinating wholesale price are decreasing in loss aversion and confidence levels, respectively. We also find that when the contract parameters are restricted, the combined contract may coordinate the supply chain even though neither of its component contracts coordinate the chain.
Highlights
Double marginalization prevails in supply chain management and hurts the supply chain performance tremendously
CVaR measure is introduced into our supply chain coordination problem to hedge against the risks for the loss-averse retailer
The relevant literature will be reviewed according to three streams: supply chain coordination based on loss aversion, supply chain coordination under CVaR criterion and inventory problem based on loss aversion under CVaR criterion
Summary
Double marginalization prevails in supply chain management and hurts the supply chain performance tremendously. CVaR measure is introduced into our supply chain coordination problem to hedge against the risks for the loss-averse retailer. We devote to answer the following questions: (1) How does the loss-averse retailer select the order quantity maximizing CVaR of utility in a supply chain? To address the above problems, this paper analytically models and characterizes the coordination of a supply chain in which the retailer is loss-averse and CVaR measure is introduced. The effects of loss aversion, confidence level and contract parameters on optimal order quantity, expected utility and coordinating wholesale price are analyzed, respectively.
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