Quality investment and price decision in a risk-averse supply chain

Gang Xie, Wuyi Yue, Shouyang Wang and Kin Keung Lai

European Journal of Operational Research, 2011, vol. 214, issue 2, 403-410

Abstract: In this paper, we investigate quality investment and price decision of a make-to-order (MTO) supply chain with uncertain demand in international trade. Due to volatility of orders from buyers, the supplier and the manufacturer in the supply chain are subject to financial risk. In contrast to the general assumption that players in a supply chain are risk neutral in quality investment and price decision, we consider the risk-averse behavior of the players in three different supply chain strategies: Vertical Integration (VI), Manufacturer's Stackelberg (MS) and Supplier's Stackelberg (SS). The study shows that both supply chain strategy and risk-averse behavior have significant impacts on quality investment and pricing. Compared to a risk-neutral supply chain, a risk-averse supply chain has lower, same and higher quality of products in VI, MS and SS, respectively. Also, we derive the conditions under which the supply chain strategy is implemented in a decentralized setting. A numerical study is used to illustrate some related issues.

Keywords: Quality; investment; Supply; chain; strategy; Preference; theory; Make-to-order; Risk; tolerance (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:214:y:2011:i:2:p:403-410

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