The effect of risk aversion on a supply chain with postponed pricing

Abstract

We consider a supply chain consisting of a supplier and a risk-averse retailer operating under endogenous demand in retail pricing. The demand potential is uncertain and is revealed at the beginning of the selling season when it is too late to order products. The product price, on the other hand, is not determined in advance and can be postponed until the demand is revealed. The goal is to study the effect of risk-aversion and postponed pricing on both the retailer’s decisions and the overall supply chain. We find that the risk-averse retailer does not necessarily order less than the risk-neutral one and may introduce a bias by choosing a specific demand distribution. We contrast two specific choices. One is symmetric (balanced) with respect to the mean demand potential. The other is skewed (pessimistic) with most observations expected below the mean demand potential. Our numerical results show that the binding downside risk constraint deteriorates the supply chain performance when the forecast is balanced and improves it when the forecast is pessimistic.