Three-echelon supply chain coordination with a loss-averse retailer and revenue sharing contracts

Abstract

This paper studies supply chain coordination via revenue sharing contracts in two different supply chain structures. First, for a three-echelon supply chain with a loss-averse retailer, a loss-neutral distributor, and a loss-neutral manufacturer, we derive the three players’ optimal policies, and find that compared with a loss-neutral scenario, the loss-averse retailer gains fewer profits and a lower utility. Additionally, compared with the loss-neutral scenario, the loss-averse retailer orders less when it faces a high overage cost and orders more when it faces a high shortage cost. Second, for a two-echelon supply chain consisting of a loss-averse retailer and a loss-neutral distributor, we provide the two players’ optimal policies. Third, we derive coordination conditions for the two supply chain structures, and quantify the differences between the three-echelon supply chain and the two-echelon supply chain. Furthermore, we find that Pareto improvement can be achieved under revenue sharing contracts.