Risk-neutral Retailer Research Articles

Green Investment Decisions and Coordination in a Green Agri-Product Supply Chain considering Risk Aversion and Bargaining Power under Different Channel Power Structures

With eco-friendly green agriculture becoming the development trend of modern agriculture, how to make green investments and how to coordinate the supply chain become the key issues of agricultural green development. Using game theory and optimization theory, this paper studies the green investment decision in a two-echelon agricultural supply chain composed of a risk-averse farmer and a risk-neutral retailer under different power structures including three kinds of decentralized decision making and three kinds of cooperative decision making and conducts the supply chain coordination based on generalized Nash bargaining model. The results show that under decentralized decision making, Nash vertical, farmer-led, and retailer-led maximizes green investment level, the expected utility of farmer and retailer, respectively. In addition, the cooperative decision increases the marginal revenue, sales price, and the expected utility of the retailer and decreases the expectations of farmers. Except for retailer-led cooperative decisions, all cooperative decisions have increased the level of green investment and wholesale prices; among the six decision models, the green investment level is negatively correlated with risk aversion, while it is positively correlated with the cost-sharing contract. The optimal cost-sharing ratio is positively correlated with risk aversion and bargaining power. The cost-sharing contracts are invalid when farmers have full bargaining power. Numerical analysis shows that a cost-sharing contract with equal bargaining power can achieve perfect coordination in the supply chain.

Research on the Financing Strategy of Small, Medium and Micro Manufacturing Enterprises in the Environment of Output Uncertainty

Small and medium-sized enterprises often face the risk of uncertain output. We considered a supply chain system composed of a single risk-neutral retailer and a single risk-averse manufacturer. When manufacturer is faced with capital constraints in the production of green products, they can solve it by external financing to third-party financial institutions or internal financing to retailer. At the same time, the retailer can determine the expected order quantity according to the market demand, the wholesale price and the green technology input level of the manufacturer. Based on these, we construct three game models: no financing model, external financing model and internal financing model, and study the financing strategy of manufacturer and the ordering strategy of retailer. The results show that the manufacturer's profit is the largest when producing green products. At this time, both internal financing and external financing are optimal financing decisions for the manufacturer. However, the retailer 's optimal ordering strategy is when only green products are sold and the manufacturer conducts internal financing.

Weather rebate contracts for different risk attitudes of supply chain members

Firms that deal with weather-sensitive products are often exposed to weather risk. How a weather rebate contract can be implemented to improve the performance of a supplier-retailer supply chain is investigated. The supplier offers a weather rebate to the retailer to compensate for the loss of sales due to weather risk. Depending on certain weather conditions, the retailer receives the rebate if it orders beyond a predefined ordering quantity. Depending on its risk attitude, the supplier uses weather derivatives to minimize the downside risk. The performance of weather rebate contracts is analyzed for three cases: risk-neutral supplier and risk-averse retailer, risk-averse supplier and risk-neutral retailer, and risk-averse supplier and risk-averse retailer. Conditional Value at Risk (CVaR) is used as the risk measure. The supply chain coordination under weather risk is investigated, and the specific conditions of a weather rebate contract leading to a Pareto-improving solution for both parties are obtained. To the best of the authors’ knowledge, this is the first study that investigates the weather rebate contract incorporating the risk attitude of the firms using a cooling degree days (CDD)/heating degree days (HDD)-based rebate structure. A comparative analysis between the weather rebate and wholesale price contracts is carried out based on the actual temperature and demand data. The results show that the weather rebate contract outperforms the regular wholesale price contract in all three cases. The study also demonstrates how to use weather derivatives to improve the performance of a supply chain dealing with weather-sensitive products.

Optimal sourcing decisions considering quantity constraints under rank-dependent utility theory

To improve profits, retailers can order products from two suppliers: one cheap supplier with a long lead time and one quick-response supplier with a high cost. Business practices and empirical investigations have shown that retailers’ actual ordering decisions often deviate from expected utility due to behavioural factors. This paper investigates a sourcing problem for a retailer from two manufacturers with different lead times and costs under quantity constraints considering rank-dependent utility theory (RDEU). RDEU involves behavioural factors, including loss aversion, reference profit and weighting of probabilities. For this problem, we build a two-stage ordering model and derive the optimal ordering decisions before and during the selling season by using convex optimisation methods. We characterise the optimal ordering decisions of the retailer under RDEU considering different quantity constraints. We compare the results with those under the expected utility theory (EUT). We analyse the effects of behavioural factors on the retailer’s ordering decisions. It is found that when the selling price is larger, a retailer will always order more from the manufacturers before the selling season under EUT but may order less under RDEU when facing demand uncertainty and quantity constraints during the selling season. Additionally, when the selling price is high, the loss-averse retailer should order more than the risk-neutral retailer to avoid inventory shortage. A higher degree of loss averseness will induce the retailer to delay placing orders to gain more demand information and reduce the possibility of stock out or overstock.

Sourcing decisions with loss aversion under yield and demand randomness.

Yield and demand randomness are common in the industry, and loss aversion has been regarded as an inherent behavior for decision-makers. We combine these two factors and investigate a retailer's ordering decisions under both yield and demand randomness with loss aversion. Before the selling season, the demand is unknown and the loss-averse retailer places an order from an unreliable supplier with an uncertain yield rate. After the demand and supply from the unreliable supplier are known, the retailer can carry out emergency replenishment from a spot market during the selling season. We characterize the retailer's optimal ordering decisions in three scenarios: (1) the retailer is risk-neutral; (2) the retailer is loss-averse and has a zero reference profit; (3) the retailer is loss-averse and has a nonzero fixed reference profit (FRP). We compare the retailer's order quantities in the three scenarios and find that the order quantity of the loss-averse retailer with a zero reference profit is always lower than that of the risk-neutral retailer. However, the order quantity of the loss-averse retailer with a nonzero fixed reference profit is higher than that of the risk-neutral retailer when the salvage value is sufficiently large. Interestingly, we find that the loss-averse retailer's optimal order quantity decreases with the reference profit and increases with the loss-averse degree and the maximum fulfillment rate from the unreliable supplier under some conditions. We investigate these conditions under a uniform demand distribution. We further study the ordering quantity of the retailer with a prospect-dependent reference point (PRP) and compare the results under FRP and PRP.

Green Investment Decision and Coordination in a Retailer-Dominated Supply Chain Considering Risk Aversion

With the sustainable development of the global economy, environmental problems and the green economy are increasingly becoming points of concern for the community. However, the large amount of capital invested in green technology and the high price of green products have become the key problems hindering the development of a risk-averse green supply chain. In order to promote the supply chain to increase green investment level, improve the green degree of products, and reduce the impact of risk aversion on green investment, this paper studies a two-echelon green supply chain composed of a risk-averse manufacturer and a risk-neutral retailer, in which the retailer is the leader and the manufacturer is the follower. We construct the wholesale price contract model, cost-sharing contract model, and two-part contract model, respectively, and use the Optimization Theory and Methods to discuss the impact of the three contracts on the green degree, expected utility of supply chain, retail price, consumer surplus, and social welfare. The results show that in the cost-sharing contract, compared with the wholesale price contract, the green degree of the product has been significantly improved, but the expected utility of the supply chain enterprises cannot achieve Pareto improvement, and the higher consumer environmental awareness will cause the manufacturer’s expected utility to decline. In the two-part tariff contract, compared with the wholesale price contract, the expected utility of supply chain enterprises achieves Pareto improvement, and the green degree of products is the highest in the three contracts; more importantly, in the two-part contract, the product green degree, the retail price, and the expected utility of the supply chain are not related to the manufacturer’s risk aversion; meanwhile, the retail price in the two-part tariff is the lowest among the three contracts, and the consumer surplus and social welfare are the highest. Our main contribution is that the two-part contract eliminates the influence of the manufacturer’s risk aversion on the above decision variable and realizes the unification of manufacturers, retailers, consumers, and social benefits. Finally, this paper uses numerical examples to verify the above conclusions and then analyzes the sensitivity of the supply chain system.

Unfair and Risky? Profit Allocation in Closed-Loop Supply Chains by Cooperative Game Approaches

Behavioral factors (i.e., risk aversion and fairness concern) are considered for profit allocation in a closed-loop supply chain. This paper studies a two-echelon closed-loop supply chain (CLSC) consisting of a risk-neutral manufacturer, a risk-averse fairness-neutral retailer, and a risk-neutral retailer having fairness concerns. Cooperative game analysis is used to characterize equilibriums under five scenarios: a centralized, a decentralized and three partially allied models. Analytical results confirm that even when factoring in retailers’ risk aversion and fairness concern, the centralized model still outperforms decentralized. This paper makes a numerical study on the effects of risk aversion and fairness concern on profit distribution under these five models. It reveals that the impact of the risk aversion parameter and fairness concern parameter is dynamic, not always positive or negative. These research results provide helpful insights for CLSC managers to find out available choices and feasible ways to achieve fair profit allocations.

Financing strategy selection and coordination considering risk aversion in a capital-constrained supply chain

<p style='text-indent:20px;'>By applying Stackelberg game theory, this paper investigates the supply chain with a risk-neutral retailer and a risk-averse supplier, measuring risk-averse behavior by using conditional value-at-risk (CVaR). The equilibrium solutions of the supplier's wholesale price and the retailer's order quantity are obtained under two financing strategies: supplier financing (SF) and supplier investment (SI). It is found that the supplier's risk aversion is a crucial factor affecting both parties' financing decisions, and the supplier should offer different financing strategies to the retailer based on his risk attitude and the profit-sharing coefficient. However, the retailer prefers SF regardless of the supplier's risk aversion. Taking bank credit financing as a basic model, the advantages of SF and SI have been investigated. A Pareto improvement region for the two finance strategies has been identified and some suggestions are provided for the supplier's optimal utility. Then we extend to the situation that both parties are risk-averse and use the financing cost-sharing mechanism to achieve centralized decision-making.</p>

Environmental Taxes in Newsvendor Supply Chains: A Mean-Downside-Risk Analysis

Nowadays, governments all around the world have implemented rules and launched legislation to enhance environmental sustainability. Supply chain systems are hence operated under different forms of legislation, such as the carbon tax or extended producer responsibility tax. In this paper, we examine the newsvendor model-based supply chain systems with the consideration of all common forms of environmental taxes. We highlight how the retailer’s risk attitude and the number of consumer returns affect: 1) supply chain operations; 2) performances of the environmental taxes; and 3) supply chain coordination (i.e., optimization). To be specific, we derive the optimal inventory decisions of the retailer when she is risk neutral and risk averse, respectively. We then uncover how environmental taxes and consumer returns affect the retailer’s optimal inventory decisions under different risk attitudes. We further explore the supply chain coordination challenge under three different contracts, characterize their flexibility in coordinating the channel and discuss the impacts of the environmental taxes and consumer returns on each coordination mechanism. Our analytical results show that the two-part tariff contract can achieve coordination for the case with a risk neutral retailer only, while markdown sponsor (MDS) contract and revenue-sharing policy (RSP) can achieve coordination for both risk neutral or risk averse retailer cases. Besides, we reveal that the examined contracts can coordinate the supply chain with a risk neutral retailer more flexibly than that with a risk averse retailer. Finally, by comparing between the MDS contract and RSP, we find that the environmental taxes and the consumer returns will affect the coordination mechanism differently toward the risk neutral and risk averse retailers. Impacts brought by the consumer returns are also explored.

Collaboration and sharing in a retailer-led supply chain with yield uncertainty and loss aversion

This paper addresses a retailer-led supply chain in which a loss-averse supplier subject to yield uncertainty sells products to a risk-neutral retailer facing stochastic demand. An option contract is introduced to develop collaboration and sharing models to improve channel performance and achieve supply chain coordination. We derive the closed-form solution for the optimal production policy, and show that option contract is a viable alternative to effectively mitigate the serious conflicts between the dominant retailer and the supplier, which leads to a win-win situation. We analyse how the loss-averse behaviour of the supplier affects the production strategy and contract design. Also, we discuss how to share profit between the retailer and the supplier to achieve Pareto-improvement. In addition, we examine the role of option contract for achieving channel coordination and Pareto-improvement under loss aversion and single-side uncertainty. [Received: 5 November 2019; Accepted: 31 May 2020]

Coordination of VMI supply chain with replenishment tactic under risk aversion and sales effort

This paper considers a vendor-managed inventory (VMI) supply chain consisting of a risk-averse supplier and a risk-neutral retailer engaging in sales promoting efforts. Under the conditional risk at value, we examine three different types of contracts with the replenishment option for coordinating the VMI supply chain, namely, a risk diversification and cost sharing (RDCS) contract, an option and cost sharing contract, and a subsidy and cost sharing contract. Firstly, we derive the optimal production strategy and analyze the capability of each of the proposed contracts in coordinating the VMI supply chain. We find that all of those contracts can achieve coordination of the supply chain with Pareto improvement. Secondly, we also show that both the supplier and the retailer prefer the RDCS contract over the other two contracts. Finally, we use numerical experiments to analyze the impact of risk aversion on contracts’ parameters.

Impact of Price–Quantity Uncertainties and Risk Aversion on Energy Retailer’s Pricing and Hedging Behaviors

The joint uncertainties of wholesale price and end-user demand quantity often poses huge pricing challenges to energy retailers. However, the literature lacks analysis of such uncertainties’ impacts on retailer pricing behaviors and possible hedging behaviors. To study these impacts, this paper proposes four models: a risk-averse or a risk-neutral retailer deciding retail price with or without forward contract. We present closed-form solutions for these four models on optimal retail price, as well as optimal forward position (if allowed). We propose a novel approach of volatility decomposition to describe the relationship between behaviors and different volatility sources. Comparative statics gives detailed analysis of the pricing and hedging behaviors in both uncertainties, as well as their correlation. We obtain profit distributions using Monte Carlo simulations in the context of the California Electricity Market. Results show that the price and quantity uncertainties and their correlation create significant differences in the retailer’s behaviors, and the determinants of these differences are different. In addition, forward contract increases expected profit and decreases profit volatility for risk-averse retailers simultaneously. These results could serve as a benchmark for analyses of deregulated, imperfect energy markets coupled with contingent financial markets under both price and quantity uncertainties.

The effect of information superiority on a supply chain of virtual products

Virtual products, such as mobile apps, 3D print files, e-music, etc., are produced with ample capacity and supplied with zero lead-time. We consider a two-echelon supply chain of a virtual product whose parties, a manufacturer and a retailer, operate under a revenue-sharing contract and face information asymmetry about demand. Demand is sensitive to the selling price and to the levels of sales effort and product quality. The manufacturer, who is more informed party, applies a strategic information-sharing policy. Assuming that the retailer is unaware of the manufacturer's information superiority, we find that when the retailer is risk-neutral, different beliefs regarding the distribution of the base demand will not affect the manufacturer's and the retailer's decisions as long as they share the same belief regarding the mean demand. In addition, we show that, given an actual base demand, the retailer is better off when her forecast is pessimistic, whereas the manufacturer is better off when the retailer's forecast is optimistic. Measuring the expected value of hidden manufacturer's information superiority compared with known and probabilistic superiorities, we prove that known superiority is better off for the retailer, whereas hidden superiority is better off for the manufacturer. Moreover, we prove that known superiority results in non-strategic information sharing, whereas probabilistic superiority may lead to strategic information sharing. We further extend our analysis and show that, under hidden superiority, interacting with a risk-averse retailer is more profitable for the manufacturer than interacting with a risk-neutral retailer, despite the risk-averse retailer's reduced investment in sales effort.

Impact of risk aversion on two-echelon supply chain systems with carbon emission reduction constraints

This study examines a two-echelon supply chain consisting of two competing manufacturers and one retailer that has the channel power, in which one manufacturer is engaged in sustainable technology to curb carbon emissions under the cap-and-trade regulation while the other one operates its business as usual in a traditional manner. Two different supply chain configurations concerning risk attributes of the agents are considered, that is, (ⅰ) two risk-neutral manufacturers with one risk-averse retailer; and (ⅱ) two risk-averse manufacturers with one risk-neutral retailer. Under the mean-variance framework, we use a retailer-leader game optimization approach to study operational decisions of these two systems. Specifically, optimal operational decisions of the agents are established in closed-form expressions and the corresponding profits and carbon emissions are assessed. Numerical experiments are conducted to analyze the impact of risk aversion of the underlying supply chains. The results show that each risk-averse agent would benefit from a low scale risk aversion. Further, low carbon emissions could be attainable if risk aversion scale of the underlying manufacturer is small or moderate. In addition, the carbon emissions might increase when risk aversion of the traditional manufacturer or the retailer is of small or moderate scale.

Optimal Option Purchasing Decisions for the Risk-Averse Retailer with Shortage Cost

To hedge against potential risks, this paper introduces the conditional value-at-risk (CVaR) measure into the option purchasing for the risk-averse retailer with shortage cost. We introduce two models for the risk-averse retailer to select the optimal option purchase quantity. It is found that both two optimal option purchase quantities to two models can be decreasing in the retail price and increasing in the option executing price under certain conditions. This is different from the optimal option purchase quantity for a risk-neutral retailer to maximize the expected profit. It is found that both two optimal option purchase quantities may be increasing or decreasing in the confidence level, which implies a retailer who becomes more risk-averse may purchase more or fewer options to hedge against potential risks. Under both two optimal option purchase quantities, it is proven that the retailer’s expected profit is decreasing in the confidence level. This confirms the fact that high return implies high risk while low risk comes with low return.

Revenue sharing contract under asymmetric information

We analyse a two stage supply chain with a single risk neutral manufacturer and a risk neutral retailer in a single period setting. The retailer associates costs towards procurement of the product and its marketing and sales. These costs are often private information of the retailer; the retailer has an incentive to overstate his associated costs to acquire a larger share of revenue. In this paper, assuming retailers have private information about their associated costs we derive an optimal revenue sharing contract as designed by the manufacturer for each of the cost structure of the retailers. The retailer's choice from such a contract menu reveals information about their true cost. We analyse our model under various scenarios; we observe that the proposed revenue sharing contract improves the profit of manufacturer and that of the total supply chain.

Revenue sharing contract under asymmetric information

We analyse a two stage supply chain with a single risk neutral manufacturer and a risk neutral retailer in a single period setting. The retailer associates costs towards procurement of the product and its marketing and sales. These costs are often private information of the retailer; the retailer has an incentive to overstate his associated costs to acquire a larger share of revenue. In this paper, assuming retailers have private information about their associated costs we derive an optimal revenue sharing contract as designed by the manufacturer for each of the cost structure of the retailers. The retailer's choice from such a contract menu reveals information about their true cost. We analyse our model under various scenarios; we observe that the proposed revenue sharing contract improves the profit of manufacturer and that of the total supply chain.

Application of Prepaying Mode under Cash Shortage with Supplier

In order to study the negative impact of supplier cash flow shortage on the efficiency of the supply chain with stochastic market demand, we take a secondary pull supply chain involving a single product consisting of a risk-neutral supplier and a risk-neutral retailer as the research object and establish a dynamic game model in which the supplier suffers from cash flow shortage with wholesale price and production quantity as endogenous variables. The results show that the supplier’s cash flow shortage will reduce the supplier’s optimal production quantity, thereby reducing the efficiency of the supply chain. In order to improve the efficiency of the supply chain, the retailer provides prepayment for the supplier and obtains the price discount for the reserved product, we establish a dynamic game model that considers the opportunity cost of the retailer and obtain the optimal decisions for both parties.

The Incentive Model in Supply Chain with Trade Credit and Default Risk

Trade credit is widely used for its advantages. However, trade credit also brings default risk to the manufacturer due to the uncertain demand. And moral hazard may aggravate the default risk. The purpose of this paper is to investigate the role of moral hazard in trade credit and explore incentive contract under uncertain demand and asymmetric information. We consider a two‐echelon supply chain consisting of a risk‐neutral retailer ordering a single product from a risk‐neutral manufacturer. Market demand is stochastic and is influenced by retailer’s sales effort which is his private information. Incentive theory is used to develop the principal‐agent model and get the incentive contract from the manufacturer’s perspective. Results show that the retailer will reduce his effort level to get more profit and the manufacturer’s profit will be reduced, in the case of asymmetric information. Facing this result, the manufacturer will reduce the order quantity in incentive contract to lessen his losses. Numerical examples are provided to illustrate all these theoretical results and to draw managerial insights.

Coordination of VMI supply chain with a loss-averse manufacturer under quality-dependency and marketing-dependency

This paper addresses a vendor-managed inventory (VMI) supply chain with a loss-averse manufacturer and a risk-neutral retailer. Market demand faced by the retailer is stochastic and dependent on product quality level and marketing effort level. We propose a combined contract composed of option and cost-sharing to investigate coordination and profit allocation issues of the supply chain. To model loss aversion of the manufacturer, we employ multiple mental accounts and apply the utility function to upside and downside potentials of manufacturer's production decision separately. We derive the optimal strategy for each member with a Stackelberg game in which the retailer acts as the leader. It is proved that both coordination of the supply chain and Pareto-improvement can be achieved synchronously by the combined contract. In the premise of coordination, the system-wide profit can be allocated arbitrarily only by option price. Through negotiation, the retailer and the manufacturer just need to confirm an appropriate option price to obtain that neither of them becomes worse off. We also find that the manufacturer's loss aversion is a significant element for contract design and profit allocation, and the manufacturer could benefit from its own loss aversion behavior under certain condition.