Coping with Loss Aversion and Risk Management in the Supply Chain Coordination

Wei Liu, Han Zhao, Shiji Song, Wenxuan He and Xiaochen Li
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Wei Liu: Department of Basic Science, Wuhan Donghu University, Wuhan 430212, China
Han Zhao: Department of Finance and Audit, Army Logistics University, Chongqing 401311, China
Shiji Song: Department of Automation, Tsinghua University, Beijing 100084, China
Wenxuan He: Department of Basic Science, Wuhan Donghu University, Wuhan 430212, China
Xiaochen Li: Department of Basic Science, Army Logistics University, Chongqing 401311, China

Sustainability, 2021, vol. 13, issue 8, 1-18

Abstract: In this paper, we apply a combined revenue sharing and buyback contract to investigate the channel coordination of a two-echelon supply chain with a loss-averse retailer. Since loss-averse decision makers usually take on more risks, the Conditional Value-at-Risk (CVaR) measure is introduced to hedge against it and the retailer’s objective is to maximize the CVaR of utility. We obtain the retailer’s optimal order quantity under the combined contract. It is shown that there is a unique wholesale price coordinating the supply chain if the retailer’s confidence level is less than a threshold that is independent of contract parameters. Moreover, a complete sensitivity analysis of parameters is carried out. In particular, the retailer’s optimal order quantity and coordinating wholesale price decreases as the loss aversion or confidence level increases, while it increase as the buyback price or sharing coefficient increases. Furthermore, there exists the situation where the combined contract can coordinate the chain even though neither the revenue sharing nor buyback contract can when the contract parameters are constrained.

Keywords: conditional value-at-risk; supply chain coordination; optimal policy; loss aversion; risk management (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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