Coordination of a supply chain with a loss-averse retailer under two types of contracts
This article studies a one-manufacturer and -retailer supply chain facing uncertain demand. The manufacturer sells a perishable product to the retailer. Different from the traditional supply chain models based on risk neutrality, this article takes the viewpoint of the behavioural theory and assumes that the retailer is loss averse. The objective is to design the supply contract that provides a win–win coordination mechanism between the manufacturer and the retailer. Specifically, two types of contracts, buyback contract and markdown-price contract, are analysed. This article investigates the role of contracts mitigating the loss-aversion effect, which decreases the order quantity of the retailer and the total channel profit. As a comparison, these two types of contracts that ignore loss aversion are also discussed. The analytical and numerical results shed light on how a manufacturer can design a contract to improve the channel performance. In particular, it is shown that these two types of contracts can coordinate the supply chain and arbitrarily allocate the expected channel profit between the manufacturer and the retailer.