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

Bin Chen, Wenying Xie, Fuyou Huang and Juan He

European Journal of Industrial Engineering, 2021, vol. 15, issue 3, 381-404

Abstract: 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]

Keywords: supply chain coordination; Pareto-improvement; option contract; yield uncertainty; loss aversion. (search for similar items in EconPapers)
Date: 2021
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