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Channel Coordination for a Supply Chain with a Risk‐Neutral Manufacturer and a Loss‐Averse Retailer*
Abstract
This articles considers a decentralized supply chain in which a single manufacturer is selling a perishable product to a single retailer facing uncertain demand. It differs from traditional supply chain contract models in two ways. First, while traditional supply chain models are based on risk neutrality, this article takes the viewpoint of behavioral principal–agency theory and assumes the manufacturer is risk neutral and the retailer is loss averse. Second, while gain/loss (GL) sharing is common in practice, there is a lack of analysis of GL-sharing contracts in the supply chain contract literature. This article investigates the role of a GL-sharing provision for mitigating the loss-aversion effect, which drives down the retailer order quantity and total supply chain profit. We analyze contracts that include GL-sharing-and-buyback (GLB) credit provisions as well as the special cases of GL contracts and buyback contracts. Our analytical and numerical results lend insight into how a manufacturer can design a contract to improve total supply chain, manufacturer, and retailer performance. In particular, we show that there exists a special class of distribution-free GLB contracts that can coordinate the supply chain and arbitrarily allocate the expected supply chain profit between the manufacturer and retailer; in contrast with other contracts, the parameter values for contracts in this class do not depend on the probability distribution of market demand. This feature is meaningful in practice because (i) the probability distribution of demand faced by a retailer is typically unknown by the manufacturer and (ii) a manufacturer can offer the same contract to multiple noncompeting retailers that differ by demand distribution and still coordinate the supply chains.
... The decentralized supply chain is coordinated when the order volume of the decentralized supply chain equals the order volume of the centralized supply chain, resulting in the total expected payoff of the decentralized supply chain equaling the total expected payoff of the centralized supply chain [6][7][8]. The most widely applied wholesale price contract provides insights on adjusting decision makers' target utility to improve overall efficiency. ...
... Analyzing the optimal wholesale price decision of the supplier requires calculating the maximum value point of the function (8) in the range c, 2l−h b of the wholesale price. The first-order derivative H (w) and second-order derivative H (w) of the function H(w) are H (w) = m − br P (w) − b(w − c)(r P (w)) and H (w) = −2b(r P (w)) − b(w − c)(r P (w)) . ...
... We need to analyze the existence of optimal wholesale prices specifically for specific values. According to Theorem 3, substituting r P (w) can obtain the supplier's payoff function (8) given in the following four forms: ...
Decision makers’ behavioral preferences have always been important in coordinating the supply chain. Decision makers need to choose a partner wisely to increase the profitability of the entire supply chain, especially in the competitive e-commerce environment. In this paper, we examine a two-echelon e-commerce supply chain with one retailer and one supplier using the most popular wholesale price contract to facilitate collaboration. Traditional research has shown that the classical expectation model cannot coordinate the supply chain. We apply the focus theory of choice to describe the retailer’s behavior as a follower, and we examine the impact of the retailer’s pricing decisions on the supplier under different focus preferences and the coordination for the entire supply chain. The lower the parameter φ, which represents the degree of positivity, and the higher the parameter κ, which represents the level of confidence, the closer the profit of the whole supply chain is to the coordination result—both are visualized through numerical experiments and images. In the case of φ determination, the lower the κ, the better the supply chain coordination. The finding implies that the retailer may be able to coordinate the supply chain and produce better results than the expectation model when he or she makes choices using a positive evaluation system that includes both higher levels of optimism and lower levels of confidence. The findings of the FTC model can simultaneously offer a theoretical foundation for expanding collaboration among supply chain participants and management insights for decision makers to choose cooperation partners.
... In the apparel industry, the "buyback credit" is known as "markdown money" that is offered as a subsidy for clearance items. For example, manufacturers like Tommy Hilfiger, Jones Apparel Group, Ralph Lauren, and Liz Claiborne offer markdown money to retailers like Federated (also known as Macy's), Kohl's, J.C. Penney, Dillard's, and Saks [57][58][59]. ...
... Researchers applied the buyback contract in various supply chain structures such as a linear supply chain [59], a supply chain with two production modes [60], a supply chain with effort-dependent demand [46,61], and a supply chain with a loss-averse retailer [59]. Besides the profitability objective of applying a supply chain contract, a second objective is to coordinate the supply chain. ...
... Researchers applied the buyback contract in various supply chain structures such as a linear supply chain [59], a supply chain with two production modes [60], a supply chain with effort-dependent demand [46,61], and a supply chain with a loss-averse retailer [59]. Besides the profitability objective of applying a supply chain contract, a second objective is to coordinate the supply chain. ...
Supply chain price variability, also known as the ‘Bullwhip effect in
Pricing (BP)’, refers to the absorption or amplification of the variability of prices
from one stage to another in a supply chain. This article derives analytical
conditions that result in BP considering a buyback contract and conducts numerical
simulations to gain further insights. For this, a joint price and replenishment setting
newsvendor model with a wholesale-Stackelberg game is considered. Two demand
types (linear and isoelastic) are analyzed along with uniformly and normally
distributed additive and multiplicative uncertainties. The outcome of this research
reveals that the main influential factors that affect BP are the structure and error
type of the demand functions. Absorption (amplification) in price fluctuations
occurs for linear (isoelastic) demand cases. Moreover, the price variances and BP
ratios differ under the buyback and wholesale-price-only cases. The overall results
help understand the fluctuation of market prices under various conditions.
... They showed that the best contract is difficult to implement. Other related works on SCC include Wang and Webster (2007), Choi et al. (2008), Wei and Choi (2010), He and Khouja (2011), Choi et al. (2018), Zhuo et al. (2018, and Yang et al. (2018). All these papers focus on coordinating a simple supply chain with two agents. ...
... We briefly discuss the definition of supply chain optimality for the risk-neutral case in Online Appendix C1. For the case where the agents are risk-averse, we find that there are mainly three ways to define supply chain optimality: the Pareto optimality (PO) criterion (e.g., Gan et al., 2004;Chen et al., 2014), the supply chain's expected profit maximization (SCEPM) criterion (Wang and Webster, 2007), and the supply chain's objective maximization (SCOM) criterion (e.g., Choi et al., 2008;Wei and Choi, 2010;Zhuo et al., 2018). Below we discuss these three criteria. ...
... Clearly, under this criterion, just as in the case where all the agents are risk-neutral, supply chain optimality is independent of the contract form because the supply chain's expected profit function is the same across all the contract types. For more details on this criterion, we refer readers to Wang and Webster (2007). ...
In recent years, research on supply chain coordination (SCC) with risk-averse agents has received much attention. Previous studies are primarily concerned with the coordination of a single-manufacturer-single-retailer supply chain using different definitions of SCC, and what is lacking is a comprehensive analysis of the achievability of SCC. We provide a systematic analysis of SCC with risk-averse agents. We see that three definitions of SCC have been proposed in the literature to investigate SCC with risk-averse agents, among which the one based on Pareto optimality (PO) stands out. Here we explore the challenges of using the PO criterion. Specifically, we first examine the standard two-agent supply chain under the mean-variance (MV) and mean-downside-risk (MDR) objectives. What we find is that the achievability of PO depends on the contract type. The wholesale price contract even with a side payment may not lead to PO. Also, unlike under MV where risk sharing is Pareto-optimal, we observe that the least risk-averse agent must take all the risk to achieve SCC under MDR. Importantly, we extend our analysis to multi-retailer, multi-manufacturer, and multi-tier supply chains. In each case, we characterize the efficient Pareto-optimal manifold in the multi-dimensional space and design coordinating contracts that result in Pareto-optimal actions acceptable to all agents. We also discover that identifying PO across all the contract forms is difficult when some other risk-aversion criteria are considered. We conclude by providing suggestions and methods for SCC when we are unable to identify PO.
... They showed that the best contract is difficult to implement. Other related works on SCC include Wang and Webster (2007), Choi et al. (2008), Wei and Choi (2010), He and Khouja (2011), Choi et al. (2018), Zhuo et al. (2018), and Yang et al. (2018). All these papers focus on coordinating a simple supply chain with two agents. ...
... We briefly discuss the definition of supply chain optimality for the risk-neutral case in Supporting Information Appendix C1. For the case where the agents are risk averse, we find that there are mainly three ways to define supply chain optimality: the PO criterion (e.g., Chen et al., 2014;Gan et al., 2004), the supply chain's expected profit maximization (SCEPM) criterion (Wang & Webster, 2007), and the supply chain's objective maximization (SCOM) criterion (e.g., Choi et al., 2008;Wei & Choi, 2010;Zhuo et al., 2018). Below we discuss these three criteria. ...
... Clearly, under this criterion, just as in the case where all the agents are risk neutral, supply chain optimality is independent of the contract form because the supply chain's expected profit function is the same across all the contract types. For more details on this criterion, we refer readers to Wang and Webster (2007). ...
In recent years, research on supply chain coordination (SCC) with risk-averse agents has received much attention. Previous studies are primarily concerned with the coordination of a single-manufacturer-single-retailer supply chain using different definitions of SCC, and what is lacking is a comprehensive analysis of the achievability of SCC. In this paper, we provide a systematic analysis of SCC with risk-averse agents. We find that three definitions of SCC have been proposed in the literature to investigate the challenges of SCC with risk-averse agents, among which the one based on Pareto optimality (PO) stands out. We then identify the challenges of using the PO criterion. Specifically, by examining the standard two-agent supply chain with different risk considerations, we see that the achievability of PO depends on the contract type, unlike in the risk-neutral case. Moreover, we find that PO can be achieved by using some simple contracts when the agents have the mean-variance (MV) or mean-downside-risk (MDR) objective, but this is not always the case with other risk objectives. We further extend our analysis to multi-retailer, multi-manufacturer, and multi-tier supply chains. In each case, we characterize the efficient Pareto-optimal frontier manifold in the multi-dimensional space and design coordinating contracts that result in Pareto-optimal actions acceptable to all agents. Finally, we provide suggestions and methods for SCC when it is impossible to achieve PO.
... Thus, developing alternative choice models instead of risk neutrality to represent more realistic situations is becoming increasingly important. Within this research stream, many studies have deviated from this assumption and incorporated loss-averse preferences into supply chain models (e.g., [18][19][20][21][22]). Loss aversion is the key feature of Prospect Theory proposed by Kahneman and Tversky [23], and means that people are more averse to losses than the same amount of gains. ...
... The retailer is a follower and the income depends highly on their principal, and then is assumed to be loss-averse. Although this setting of one risk-neutral supplier and one retailer with preferences is adopted in many supply chain contract models, the retailer is generally assumed to be loss-averse and the objective is to maximize the expected utility (e.g., [18][19][20]), or risk-averse and the objective is to maximize the CVaR of profit (e.g., [29][30][31]). Different from them, we simultaneously consider the loss aversion and risk management, and the CVaR measure is introduced to hedge against the loss-averse retailer's risk. ...
... The literature on the supply chain contract models with loss-averse agents is first discussed. Wang and Webster [18] consider a combined contract in the supply chain with a loss-averse retailer and show there exists a special class of coordinating contracts that are independent of demand. Chen et al. [32] investigate a supply chain via an option contract and derive the retailer's and supplier's optimal policies. ...
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 lossaverse 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.
... Cluster 2 (green) is defined by studies on supply and demand forecasting risk modelling. The research front is formed by supply and demand risk management (Mishra & Raghunathan, 2004;Nagurney et al., 2005;Tang, 2006), dual-channel supply chain coordination (Wang & Webster, 2007;Xu et al., 2014) and demand uncertainty (Ding et al., 2007;Du et al., 2015). The techniques and approaches used are literature analysis (Tang, 2006;Chiu & Choi, 2013); stochastic model (Mishra & Raghunathan, 2004;Seifert et al., 2004;Nagurney et al., 2005); finite-dimensional variational inequality theory, computational simulation and optimization (Nagurney et al., 2005); Agency theory, and simple piecewise linear loss-aversion utility function (Wang & Webster, 2007); mean-variance model (Ding et al., 2007;Xu et al., 2014;Chiu & Choi, 2013); and Game theory (Du et al., 2015). ...
... The research front is formed by supply and demand risk management (Mishra & Raghunathan, 2004;Nagurney et al., 2005;Tang, 2006), dual-channel supply chain coordination (Wang & Webster, 2007;Xu et al., 2014) and demand uncertainty (Ding et al., 2007;Du et al., 2015). The techniques and approaches used are literature analysis (Tang, 2006;Chiu & Choi, 2013); stochastic model (Mishra & Raghunathan, 2004;Seifert et al., 2004;Nagurney et al., 2005); finite-dimensional variational inequality theory, computational simulation and optimization (Nagurney et al., 2005); Agency theory, and simple piecewise linear loss-aversion utility function (Wang & Webster, 2007); mean-variance model (Ding et al., 2007;Xu et al., 2014;Chiu & Choi, 2013); and Game theory (Du et al., 2015). Recommendations for further research are extensions of risk models to global supply networks; empirical research to validate proposed approaches (Mishra & Raghunathan, 2004;Nagurney et al., 2005;Wang & Webster, 2007); and supply chain risk study with asymmetric information (Xu et al., 2014). ...
... The techniques and approaches used are literature analysis (Tang, 2006;Chiu & Choi, 2013); stochastic model (Mishra & Raghunathan, 2004;Seifert et al., 2004;Nagurney et al., 2005); finite-dimensional variational inequality theory, computational simulation and optimization (Nagurney et al., 2005); Agency theory, and simple piecewise linear loss-aversion utility function (Wang & Webster, 2007); mean-variance model (Ding et al., 2007;Xu et al., 2014;Chiu & Choi, 2013); and Game theory (Du et al., 2015). Recommendations for further research are extensions of risk models to global supply networks; empirical research to validate proposed approaches (Mishra & Raghunathan, 2004;Nagurney et al., 2005;Wang & Webster, 2007); and supply chain risk study with asymmetric information (Xu et al., 2014). ...
The modelling of supply chain risk management (SCRM) has attracted increasing attention from researchers and professionals. However, a systematic network analysis of the literature to understand the development of research over time is lacking. Therefore, this study reviews SCRM modelling and its evolution as a scientific field. We collected 566 papers published in the Scopus database and shortlisted 120 for review. We have analysed the field's performance, mapped the most influential studies, as well as the generative and evolutionary research areas, and derived future research directions. Using bibliometric methods and tools for citation network analysis to understand the field's dynamic development, we find that five generative research areas provide the fundamental knowledge for four evolutionary research areas. The interpretation of gaps and trends in these areas provides an SCRM modelling timeline with 14 future research directions, which should consider adopting a holistic SCRM approach and developing prescriptive and normative risk models. The holistic approach enables more research on key factors-like process integration, design, information risk, visibility and risk coordination-that directly impact industry, decision-makers and sustainability needs. Risk models with evolved prescriptive and normative typology should respect both business model strategies and actual supply chain performance.
... This type of decisionmaking behavior is identified as loss aversion, one of the key features in the Prospect Theory, which indicates that people are more sensitive to losses than to same-sized gains [25]. Since loss aversion is both intuitively appealing and well supported in finance, economics and marketing, supply chain management with loss aversion has gradually attracted increasing attention [41]. Xu et al. [43] explored the optimal option purchase of a loss-averse retailer under emergent replenishment. ...
... Furthermore, Xu et al. [46] studied the loss-averse newsvendor model with backordering. Wang and Webster [41] investigated channel coordination of a supply chain with a risk-neutral manufacturer and a loss-averse retailer under stochastic demand, and showed a distribution-free gain/loss-sharing-and-buyback contract that can achieve supply chain coordination and arbitrarily distribute the total expected profit between the manufacturer and the retailer. Chen and Xiao [4] developed three (re)ordering models of a supply chain consisting of one risk-neutral manufacturer and one loss-averse retailer, and designed a buyback-setup-cost-sharing mechanism to coordinate the supply chain for each policy. ...
... As mentioned by the existing literature [20,41], coordination of the supply chain is achieved if there is a contract such that the joint profit in the decentralized system is equal to the system-wide profit in the centralized system, that is, the optimal solutions of the decentralized supply chain are equivalent to that of the integrated one. ...
This paper deals with a one-period two-stage supply chain, in which a loss-averse retailer facing stochastic demand orders products from a risk-neutral supplier subject to yield uncertainty. Marketing effort exerted by the retailer is employed to enhance the final market demand. We first establish a performance benchmark, and show that the wholesale price contract fails to coordinate the supply chain due to the effects of double marginalization and loss aversion. Then we propose a revenue-cost-sharing contract in order to achieve supply chain coordination. It is verified that a properly designed revenue-cost-sharing contract can achieve perfect coordination and a win-win outcome synchronously. Our results reveal that it is simple to implement and arbitrarily allocate the total channel profit between the retailer and the supplier. In addition, we examine the effect of the retailer's loss aversion degree on contract parameters and profit allocation, and we show that both the retailer and the supplier can benefit from marketing effort.
... If k [ 1, the retailer is loss averse (Wang and Webster 2007). (iii) We assume that the retailer or the whole supply chain does not default, i.e., the loan from the bank will be repaid. ...
... Meanwhile, when we study supply chain coordination under a limited rational environment, we still take the maximum level of expected risk-neutral supply chain coordination as the benchmark of contract coordination. This approach is cited in the literature, such as in Wang and Webster (2007), Becker-Peth et al. (2013), and Deng et al. (2013). Therefore, for a supply chain consisting of one supplier and one risk-averse and capital-constrained retailer, the coordination goal of revenue-sharing contract is to encourage the risk-averse and capital-constrained retailer to purchase the optimal order quantity according to the risk-averse model. ...
The paper aims to provide a theoretical basis for the application of revenue-sharing contract under bounded rationality and capital constraints. We consider an uncooperative ordering model in a supplier-Stackelberg game and coordination strategy with revenue-sharing contract for a loss-averse and capital-constrained retailer. We drive the existence and uniqueness conditions of the optimal solutions under bank financing and revenue-sharing contract. We also develop a series of propositions and corollaries to determine the optimal solutions and offer some managerial insights. The key contribution of the paper is to deepen and expand the revenue-sharing contract under the risk-neutral assumption, and to provide a theoretical basis for the application of revenue-sharing contract under bounded rationality and capital constraints. We find that the revenue-sharing ratio of loss-averse and capital-constrained retailer is larger than that of neutral retailer and the expected utility of loss-averse and capital-constrained retailer is larger than that of neutral retailer under coordination strategy with revenue-sharing contract.
... Rubin et al. (2018) study the fundamental question of quality and quantity tradeoff in the presence of loss-aversion. Channel coordination in presence of a loss-averse retailer has been studied in Wang & Webster (2007) and Deng et al. (2013). While loss-aversion has been assumed in the theoretical literature, there are studies that delved into empirical testing to determine whether firms' behavior is consistent with the assumption of loss-aversion. ...
... However, they did not address the problems associated with loss-averse players. On the other hand, Katok and Wu (2009), Wang and Webster (2007), Dubey et al. (2018), andEeckhoudt et al. (2018) considered loss aversion, but did not address the problem of delivery risk. Li et al. (2016) is the only study to address the problem of delivery risk in the presence of loss-averse players. ...
The legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation and incentive compatibility constraints of the signatories. Considering loss-averse players, we have calculated optimal penalties in a supply chain contract and compared those with the liquidated damages. Two possible breaches are considered – a breach in quality of the delivery and a breach in the process. In the absence of any penalty, a process breach reduces the supplier’s delivery risk and cost of delivery. Determining the parametric conditions for efficient contracts, numerically we show the effects of various variables on the zone of efficient contract. We show that the optimal penalties need not be excessive compared to the liquidated damages.
... Shalev's version has been received widespread attention in the field of game theory [24][25][26][27]. In particular, the value function and its variants that characterizes the lossaversion preference of decision makers has been applied to supply chain decisions [28][29][30][31][32]. Until recent years, the impacts of loss-aversion preferences on decisions have increasingly received attention from an increasing number of scholars in the SCM [33][34][35][36]. ...
... Moreover, some scholars considered newsvendor problems with loss aversion. Wang [31], Ma et al. [33] and Wu et al. [35] argued that newsvendors' loss aversion decreases order quantity. Lee et al. [52] considered the supply option problem when a loss-averse newsvendor has multiple options. ...
This paper investigates a two-echelon green supply chain (GSC) with a single loss-averse manufacturer and a single loss-averse retailer. Since the Nash bargaining solution exactly characterizes endogenous power and the contribution of the GSC members, it is introduced as the loss-averse reference point for the GSC members. Based on this, a decision model of the two-echelon GSC with loss aversion is formulated. The optimal strategies of price and product green degree are derived in four scenarios: (a) the centralized decision scenario with rational GSC members, namely the CD scenario; (b) the decentralized decision scenario with rational GSC members, namely the DD scenario; (c) the decentralized decision scenario with the GSC members loss-averse, where the manufacturer’s share is below its own loss-averse reference point, namely the DD(∆m ≥ πm) scenario; (d) the decentralized decision scenario with the GSC members loss-averse, where the retailer’s share is below its own loss-averse reference point, namely the DD(∆r ≥ πr) scenario. Then, a comparative analysis of the optimal strategies and profits in these four scenarios is conducted, and the impacts of loss aversion and green efficiency coefficient of products (GECP) on the GSC are also performed. The results show that (i) GECP has a critical influence on the retail price and the wholesale price; (ii) the GSC with loss aversion provide green products with the lowest green degree; (iii) the retail price, the wholesale price and product green degree are decreasing monotonically with the loss aversion level of the GSC member without incurring loss; (iv) furthermore, the effect of the loss aversion level of the GSC member with incurring loss on the optimal strategies is related to GECP and the gap between the GSC members’ loss aversion levels.
... Shen et al. (2013) showed that the retailer will receive a higher optimal markdown offer when the supplier is less risk-averse. Overweighting losses cause ordering bias and order inflation (Shen et al., 2011;Becker-Peth et al., 2013), demonstrating that loss-aversion and loss-averse mitigating provisions should be considered in contract design (Wang & Webster, 2007;Villa & Castañeda, 2018). Moreover, SC agents view other contract elements, besides overstock or shortfalls, such as fixed fees, bonuses, or payback amounts, as losses (Wang & Webster, 2007;Katok & Wu, 2009;Shen et al., 2011;Davis et al., 2014;Davis, 2015). ...
... Overweighting losses cause ordering bias and order inflation (Shen et al., 2011;Becker-Peth et al., 2013), demonstrating that loss-aversion and loss-averse mitigating provisions should be considered in contract design (Wang & Webster, 2007;Villa & Castañeda, 2018). Moreover, SC agents view other contract elements, besides overstock or shortfalls, such as fixed fees, bonuses, or payback amounts, as losses (Wang & Webster, 2007;Katok & Wu, 2009;Shen et al., 2011;Davis et al., 2014;Davis, 2015). Villa and Castaneda (2018) showed that although participants exhibit aversion to the cost of leftovers, they also prefer leftovers to shortage (to avoid unsatisfied customers). ...
Purpose
The recent surge in behavioral studies on the coordination mechanisms in supply chains (SCs) and advanced methods highlights the role of SC coordination (SCC) and behavioral issues associated with improving the performance of the operations. This study aims to critically review the behavioral aspect of channel coordination mechanisms.
Design/methodology/approach
Following a systematic literature review methodology, the authors adopt a combination of bibliometric (to reflect the current state of the field), content (using Leximancer data mining software to develop thematic maps) and theory-oriented qualitative analyzes that provide a holistic conceptual framework to unify the literature’s critical concepts.
Findings
The analysis confirms the plethora of risk-oriented publications, demonstrating that the second largest category of studies is concerned with social preferences theory. Most studies were based on experiments, followed by analytical modeling, revealing the impact of heuristics and individual preferences in SC decisions and suggesting promising managerial and theoretical avenues for future research.
Originality/value
The study sheds light on behavioral decision theories applied to SC coordination by categorizing the literature based on the adopted theories. The methodological contributions include using automated content analysis and validating the outcome by interviewing leading scholars conducting active research on “behavioral operations management and SC contracts.” The authors also propose several directions for future research based on the research gaps.
... Our extended consideration is reasonable and may prevail in practice. As indicated by Wiseman and Gomez-Mejia (1998) and Wang and Webster (2007), the retailer can be risk-averse rather than the manufacturer. Therefore, also in line with the existing literature (Gan et al., 2005 andWang and Webster, 2007;Yang, 2008, Chiu et al., 2011a,b;Li et al., 2016;Liu et al., 2020), we consider that the retailer may possess the risk aversion behavior while the manufacturer does not. ...
... As indicated by Wiseman and Gomez-Mejia (1998) and Wang and Webster (2007), the retailer can be risk-averse rather than the manufacturer. Therefore, also in line with the existing literature (Gan et al., 2005 andWang and Webster, 2007;Yang, 2008, Chiu et al., 2011a,b;Li et al., 2016;Liu et al., 2020), we consider that the retailer may possess the risk aversion behavior while the manufacturer does not. Following Xiao and Yang (2008), Xiao and Xu (2014) and Li et al. (2016), we express the demand function as follows: ...
Green product design is an effective instrument for achieving a circular economy. To promote green product development, downstream retailers often enter into contracts with upstream manufacturers and market green products. This study considers a decentralized green product supply chain comprising of a manufacturer and a retailer, who determine the green level of the product and the exerted marketing effort level, respectively. We specifically consider two widely-adopted contracting formats: contracting designing (CD) and contracting marketing (CM). Under CD format, we examine three contract strategies for such the green product supply chain, namely, price-only (Strategy PO), cost-sharing (Strategy CS), and revenue-sharing (Strategy RS) game models. By comparing these strategies, we find that product greening level enhancement can benefit firms when the marketing effort effect is high or low. However, when the marketing effort effect is moderate, product greening level improvement does not necessarily lead to higher payoffs for firms. Furthermore, the equilibrium strategy for the manufacturer and retailer is either Strategy CS or RS depending on certain conditions. Specifically, when the marketing effort effect is low, the manufacturer and retailer prefer Strategy RS. On the contrary, when the marketing effort effect is high, Strategy CS is the equilibrium strategy for the manufacturer and retailer. We also investigate the corresponding contracts under CM format. Interestingly, compared with CM format, the whole supply chain always benefits more under CD format. We further extend to the case that the retailer is risk averse, and the whole supply chain can still be better off with cost-sharing contract under CD format in certain conditions. In addition, we find that the retailer’s risk aversion behavior may improve the performance of the whole supply chain under CD and CM formats. Our results not only complement the conventional understanding of supply chain contract theory, but also generate important managerial implications for managers in implementing green operation strategies by choosing the appropriate contracting format and corresponding contract.
... As indicated by Wiseman and Gomez-Mejia (1998) and Wang and Webster (2007), the retailer can be risk-averse rather than the manufacturer. Therefore, also in line with the existing literature (Gan et al., 2005 and2009;Wang and Webster, 2007;Xiao andYang, 2008, Chiu et al., 2011;Li et al., 2016;Liu et al., 2020), we consider that the retailer may possess the risk aversion behavior while the manufacturer does not. ...
... As indicated by Wiseman and Gomez-Mejia (1998) and Wang and Webster (2007), the retailer can be risk-averse rather than the manufacturer. Therefore, also in line with the existing literature (Gan et al., 2005 and2009;Wang and Webster, 2007;Xiao andYang, 2008, Chiu et al., 2011;Li et al., 2016;Liu et al., 2020), we consider that the retailer may possess the risk aversion behavior while the manufacturer does not. Following Xiao and Yang (2008) ...
... Gan et al. [19], Wang and Webster [20], and Li et al. [21] investigate how a supply chain that involves an upside-riskneutral supplier and a downside-risk-averse retailer can continue to coordinate with each other, and they accordingly design some corresponding contracts that help to accomplish channel coordination. Cui et al. [22] and Ozgun et al. [23] incorporate the concept of fairness into a conventional dyadic channel to investigate how fairness may affect channel coordination and the manufacturer's use of a simple wholesale price to coordinate the channel. ...
... e authors declare that they have no conflicts of interest. 20 Mathematical Problems in Engineering ...
This paper examines the influence that members’ preferred service investments have on their decision-making and profits in a dual-channel supply chain. We discuss changes in the supplier’s and retailer’s decision-making and optimal profits with reference to their different preferred service investment combination modes and their different leader-follower relationships. We also provide classified comparisons of the supplier’s and retailer’s optimal profits by referring to four types of product characteristics combination modes that are assessed across two channels. By providing classifications and comparisons, we put forward operational insights for the supplier and retailer who have direct implications for their optimal decisions and profits, including selling products with higher homogeneity between two channels, choosing the retailer as the leader of the supply chain, and confirming appropriate preference combination mode under a certain product characteristics. We analyze the influences of the preferred service investment levels as well as preference intensities of the supplier and retailer on their strategies and profits in their respective advantaged states and obtain some enlightenment about the cooperation strategies and relationship-building methods of the supplier and retailer in the actual process of their participation in the dual-channel supply chain operation.
... The aforementioned literature assumed that decision-makers in businesses are risk-neutral and that green technological innovation will always be successful, while ignoring the presence of risk-aversion preferences and the possibility of failures in green technological innovation in real life. According to relevant research, decision-makers' risk-aversion preferences in businesses have a significant impact on pricing, ordering, investment in green technological innovation, and participants' profits [21][22][23]. Therefore, this study introduced risk-aversion preferences into the manufacturing supply chain and considered the possibility of failure in green technological innovation by manufacturing companies. ...
... To achieve the objectives of these studies, the most suitable methodology is selected from various options, including models, case studies, theories, reviews and surveys, or a combination thereof. Figure 4 illustrates that a majority of the reviewed papers (34 out of 65) utilised quantitative models, primarily fed with secondary data sourced from existing datasets, to examine the effects of managerial loss aversion on corporate value creation across different scenarios (Wang and Webster 2007). However, acknowledging the significance of primary data obtained through direct observations of managerial decisions (Taleb 2007), several papers surveyed individuals for exploratory purposes. ...
To date, the studies on managerial loss aversion have produced contradictory findings, making it impossible to: (i) identify the ultimate impact of managerial loss aversion on the value that organisations create for themselves and for their stakeholders, and (ii) mitigate the effect of managerial loss aversion to improve corporate value creation. With the aim of filling this gap, the authors of this paper first performed a Systematic Literature Review (SLR), resulting in 65 relevant papers. The 65 papers were then analysed through a Thematic Analysis (TA), which was aimed at isolating and revising the single effects of managerial loss aversion on the corporate value creation process. Once it became clear when and how managerial loss aversion leads to negative impacts on corporate value creation (such as suboptimal investments in corporate social responsibility, short-term-oriented budget expenditures, illegal corporate conduct in favourable contexts, and low demand for audit quality), a novel theoretical framework was built. This framework proposes some preliminary approaches to mitigate these detrimental effects. In particular, future empirical research may operationalise potential debiasing strategies, derived from critical analysis of the literature, to reduce managerial loss aversion in different business settings, thereby improving corporate value creation.
... Loss aversion stems from the field of psychology and lies at the heart of prospect theory, initially introduced by Kahneman & Tversky (1979). This concept differs from risk aversion in that there exists a reference point that determines whether the payoff is considered a loss or a gain, and an abrupt change in the slope of the utility function at the reference point (Wang & Webster, 2007). Its effects have been studied recently in supply chain finance. ...
... Te article is also related to the stream of research on supply chain coordination. Wang and Webster [22] examined the mitigating efect of gain/loss-sharing-and-buyback contracts on the loss-aversion efect and the manufacturer's formulation of its contract with the retailer to coordinate the supply chain in a decentralized supply chain model consisting of a risk-neutral manufacturer and a loss-averse retailer. Chen et al. [23] compared the diference in decision-making between a loss-averse and a risk-neutral retailer in a supply chain model with short life-cycle products and analyzed the supply chain coordination problem in the presence of a loss-averse retailer. ...
Most studies on supply chain coordination assume that consumers are rational. However, with the development of e-commerce, consumer-bounded rationality has become an important issue with respect to supply chain coordination. Based on the assumption that some consumers are loyal to the offline shop and others are reference-dependent, this article examines the mechanism of vertical restraints and their competitive effects. This research study found that compared with the assumption of rational consumers used in previous literature, vertical restraints help internalize the “channel price gap externality” when consumers are loss averse. When separately operating, the offline shop will set a higher price due to its consumers’ higher loyalty and willingness to pay. However, given the positive externality of this price to the online retail sales, the offline price is still lower than the level under vertical integration. When the upstream manufacturer achieves supply chain coordination with vertical restraint contracts, the channel price gap externality is internalized, and the channel price gap expands to stimulate loss-averse consumers’ purchasing decisions.
... where p i represents the perceived probability of the game player when situation i occurs, and π(0) = 0, π(1) = 1 [18] and ∆ω i represents the difference between the actual payment value and the reference point value of the three-party game players after the occurrence of scenario i. When ∆ω = 0, U(0) = 0. ...
Strengthening the resource utilization of construction waste can improve the environment, alleviate resource shortage, and build a harmonious ecological environment between man and nature. Prospect theory was integrated into trilateral evolutionary game theory to analyze the processes of resource utilization of construction waste among local government, construction enterprises, and the public by establishing the perceived payoff matrix of the three players in the game and using the replication dynamic equation to analyze their strategy choices and evolution path. The results showed that the strategies of the three players depended on the strategies chosen by the other side, the perceived value of the relevant parameters, and the numerical relations among them. Under the conditions that the local government reasonably controlled the supervision cost and the degree of rewards and punishments, the construction enterprise promoted the resource-based technology and management means, and the public enhanced the sense of social responsibility, the game model would evolve toward the ideal state of (1,1,1), to realize the resource utilization of construction waste.
... It is important to credit the previous publications that have developed various conceptual or analytical model to investigate different kinds of risk within the supply chain process. In particular (Wang, 2007), developed agent based models to simulate the dynamic behavior of the supply chain under various uncertainties such as supply capacity, plant capacity, warehouse capacity and demand uncertainty. (Goetschalckx, 2013), considered SCND problem with uncertainties in demand, capacities of supplier, manufactures, warehouse and fixed location costs. ...
The thesis explores about risk and uncertainty in supply chain network citing in textile industry. Modeling and network validation by considering these risk and uncertainty in supply chain area will improve customer satisfaction, quality of goods, global share and manufacturing capabilities.
... They also compared revenue sharing contract with other popular contracts and found that revenue sharing is equivalent to buyback in newsvendor case, and equivalent to price discount in the price-setting newsvendor case. Wang and Webster (2007) considered a two-echelon supply chain with a risk-neutral manufacturer and a loss-averse retailer, and introduced a new contract combining gain/loss sharing and buyback (GLB) which coordinated the supply chain successfully and could arbitrarily allocate the expected profit. Jaber and Goyal (2008) investigated the coordination of order quantities amongst the members in a three-level supply chain assuming multiple buyers at the first level, a single vendor at the second level, and multiple suppliers at the third level. ...
One of the major objectives of modern supply chain management is dealing with the negative impact of decentralization among the involved entities and minimizing double marginalization effect within the chain, especially when the end-customers’ demand is not deterministic. This paper investigates coordination issue in a three-level supply chain with one raw-material supplier, one manufacturer, and one retailer. The retailer determines the retail price, sales effort, and order quantity simultaneously before the selling season starts. Both the supplier and the manufacturer face random yield in production. A composite contract having two components—a contingent buyback with target sales rebate and penalty between the retailer and the manufacturer, and a revenue sharing contract between the manufacturer and the supplier is proposed. The proposed composite contract is shown to achieve supply chain coordination and allows arbitrary allocation of total channel profit among all the chain members. The impact of randomness in both demand and production, and the impact of non-existence of emergency resource for the final product on the performance of the entire supply chain are analyzed. A numerical example is provided to illustrate the developed model and draw some important managerial insights.
... In particular, buyback contracts [21], revenue sharing contracts [22], and profit-sharing contracts [23] are commonly employed in outsourcing businesses. Other coordination contracts are like gain sharing contract [24], cost sharing contract [25], supply contract [26], quantity compensation contract [27], linear margin contract [28], advance-purchase contract [29], inventory subsidizing contract [30], two-part price contract [31], and supply option contract [32]. e prior literature did not explore the joint effects of time and design innovation on the quality of the products. ...
More and more companies in the supply chain choose the cooperation mode of original design and manufacturing (ODM). This paper investigates the problems of the joint design innovation and pricing strategies for the ODM supply chain by considering the impact of the dynamic of quality level on market demand. First, applying differential game theory, optimal strategies for design innovation, and pricing under decentralized and centralized scenarios are obtained. At the same time, the optimal strategies under the two decision-making scenarios are compared and analyzed. Second, a two-part tariff contract is introduced to coordinate the decentralized ODM supply chain. Finally, we further establish a Nash bargaining model among members of the supply chain. It is found that, in a centralized system, the design innovation efforts, product quality levels, and supply chain profits in the decentralized decision scenario are lower than that in the centralized decision scenario, but the selling price relationship in both scenarios depends on the parameters of the operating system.
... Контракты с обратным выкупом чаще всего применяются для следующих категорий товаров: сезонных [Lau, Lau, Wang, 2007], с коротким сроком годности [Wang, Webster, 2007;Krishnan, Winter, 2010], запчастей и деталей для сборки в B2B-секторе товаров [Shen, Willems, 2012], категории «люкс» [Chiu, Choi, Tang, 2011]. Кроме того, их используют в индустрии моды и издательском бизнесе [Donohue, 2000]. ...
The concept of supply chain coordination implies that it is possible to obtain an optimal result for both independent chain participants and supply chain due to participants’ coordinated actions. This paper examines the question whether a buyback contract will be coordinating or not. The authors argue that a coordinating buyback contract should have the following substantive properties: practical feasibility, collective and individual rationality. The paper off ers a mathematical defi nition of a coordinating buyback contract which highlights these properties. Entering into buyback contract process is considered as a two-step game of two players (a supplier and retailer) on the assumption that the players are risk neutral and make decisions with full information available, the market price is fixed, and the product demand is a random variable. The authors demonstrate that the buyback contract does not coordinate the chain, however, there has been obtained a non-empty set of eff ective contracts depending on the buyback price. For such contracts, the defi nition of “conditional coordination” is given to introduce the property of a supplier’s partial rationality; its existence was proved. The findings reveal that the choice of buyback price affects the allocation of profits between chain participants so the decision on its choice must be cooperative. To substantiate the nature of cooperative choice of conditionally coordinating contracts, the asymmetric Nash solution is considered. All results were obtained both in general terms and under the assumption that the product demand has uniform distribution. For the latter case, the conditionally coordinating contract parameters were found and it was justified that the conclusion of such a contract is possible only when a supplier has greater bargain power than a retailer.
... On one hand, scholars usually use contracts to solve the supply chain coordination problem with uncertain demand. for example, Wang and Webster [28] considered a decentralized supply chain and found that a special class of distribution-free GLB contracts exist to improve supply chain performance. Li et al. [29] conducted a mean variance (MV) analysis of a fast fashion supply chain consisting of one supplier and n risk averse retailers. ...
... Modeling a risk averse newsvendor's decision-making behavior, showed that the optimal order quantity decreases as selling price increases. Wang and Webster (2007) considered a decentralized supply chain with a single riskneutral manufacturer selling a perishable product to a single loss-averse retailer who faces an uncertain demand. They investigated the role of a gain/loss-sharing provision for mitigating the loss-aversion effect. ...
We consider a two-echelon supply chain with a risk neutral manufacturer and a loss-averse retailer. The type of loss aversion of the retailer is considered to be a private information of the retailer. Loss aversion often leads to the situation of the retailer buying below the estimated sales, which deprives the manufacturer of his market share. To offset this issue, we propose a contract design which the manufacturer offers to the retailer. We show that the contract ensures the loss averse retailer, while at the same time, it increases the manufacturer’s market share, thus creating a win–win situation for both the manufacturer and the retailer.
... Particularly, the wholesale price contract (Shen et al. 2016) and buyback contract (Niu et al. 2018) are the two most popular coordination strategies. Other coordination contracts are like gain/loss sharing contract (Wang and Webster 2007), cost sharing contract (Wang et al. 2011), supply contract (Wang et al. 2012), quantity compensation contract (Lee et al. 2013), linear margin contract (Xiao et al. 2015), advance-purchase contract (Deng and Yano 2016), inventory subsidizing contract (Chen et al. 2016), two-part price contract (Yan and Cao 2017), and supply option contract (Zhao et al. 2018). ...
The original design manufacturing (ODM) strategy has become popular in the fashion supply chain field. We consider apparel’s fashion level and advertising effort as important influential factors on goodwill, and present a differential game involving a fashion brand and a supplier. The supplier controls the design improvement effort applied to the apparel and sells it to end consumers through the fashion brand, which controls the advertising effort and retail price. In the case in which the demand for products is affected by goodwill, retail price and promotion, centralised and decentralised differential game models are constructed. The dynamic wholesale price contract is then introduced to solve the external coordination problem. Furthermore, a sensitivity analysis of the related parameters is conducted using the numerical simulation method. It is found that the introduction of the dynamic wholesale price contract increases design investment, promotion effort, and goodwill towards and demand for the products. We also derive the feasible region of wholesale prices in which both members are willing to implement the commitment scenario. The win–win region becomes larger as the effectiveness of design innovation increases, whereas it becomes smaller as price sensitivity increases.
... Supply chain coordination by using incentive alignment contracts is well explored in the literature (Wang, 2005;Sarmah, Acharya, & Goyal, 2006;Karabati & Kouvelis, 2008;Cai, 2010;Chung, Talluri, & Narasimhan, 2014;Niu, Jin, & Pu, 2016). The markdown sponsor contract is well-established in the real world (Wang & Webster, 2007). Under a typical markdown sponsor contract, the seller charges the buyer a unit wholesale price for each unit ordered as well as offers a unit markdown sponsor to each unit of unsold product at the end of the retail selling season (Pashigian, 1988;Tsay, 2001). ...
Platform operations are very common in the sharing economy. Nowadays, retailers can sell the end-of-season product leftovers to platforms which offer product rental services to the market. Motivated by this observed industrial practice, we build stylized supply chain models to explore the platform supported supply chain operations. We uncover that the presence of the platform creates the "triple marginalization" problem in which supply chain coordination cannot be achieved even if the manufacturer is willing to supply at cost using the wholesale pricing contract. We show how the markdown sponsor (MS) contract can deal with the triple marginalization problem and achieve supply chain coordination. However, we illustrate that a moral hazard problem, in which the retailer has incentive to over-claim the amount of markdown sponsor, arises. We reveal that the moral hazard problem brings a loss to the manufacturer, an immoral gain for the retailer, and there is no impact on the platform and consumers. We analytically derive the impact of moral hazard (which means the loss to the manufacturer, and the gain for the retailer) and find that it relates to the markdown sponsor rate, as well as the degree of over-claiming. To overcome the moral hazard problem under MS contract, we propose measures such as the adoption of blockchain technology, and "discounted" markdown sponsor contract, to help. We also explore the implementations of other contracts to overcome the moral hazard, like virtual buyback with inventory reallocation contract, and wholesale pricing contract with side payments.
... They find that, depending on the system parameters, the loss-averse retailer may order less than, equal to, or more than the risk-neutral retailer. Webster and Weng (2000) and Wang and Webster (2007) also study the optimization problem of a two-echelon supply chain with a risk-neutral supplier and a loss-averse retailer in the presence of perishable products. ...
Problem definition: Recent global crises have caused unprecedented economic uncertainty and intensified retailers’ concerns over inventory risks. Mitigating inventory risks and incentivizing retailer orders is critical to managing retail supply chains and restoring their norms after severe impacts. We study the allocation of inventory risk using contracts in a retail supply chain with a risk-neutral manufacturer and a risk-averse retailer. We consider two factors that affect the effectiveness of contracting: (1) asymmetric risk aversion information—retailers’ attitudes are typically diverse and unknown to the manufacturer, and (2) uncertain outside opportunity—retailers typically face a volatile external business environment. Methodology/results: With a game-theoretic model that captures the interaction among risk aversion, information asymmetry, and outside opportunity, we derive the contracting equilibrium under two widely adopted risk allocation schemes—push (i.e., the retailer bears the inventory risk) and pull (i.e., the manufacturer bears the inventory risk) contracts. Contrary to the conventional wisdom that pull contracts are more effective in risk mitigation, we show that push contracts may induce larger expected order quantities and achieve the highest supply chain efficiency due to the interaction of asymmetric risk aversion information and risky outside opportunities. We also find that the manufacturer may obtain higher profits with push contracts when both the heterogeneity in the retailer’s risk attitude and the risk of the outside opportunity are sufficiently high. In addition, when the risk of the outside opportunity is in a medium range, the push contract allows the manufacturer to fully eliminate the information rent and achieve the supply chain’s first-best outcomes. We further evaluate the effects of product profitability and demand uncertainty and generalize the retailer’s risk measure to any coherent risk measure. Managerial implications: Our analysis highlights the importance of modeling asymmetric risk aversion information and risky outside opportunities in analyzing supply chain contracting. When considering these practical factors, allocating more inventory risks to a risk-averse retailer may be better than a risk-neutral manufacturer. Our results provide novel insights into the selection of proper contract types for managing inventory risks in retail supply chains.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0624 .
The standard newsvendor problem has attempted to determine the ideal ordering quantity considering the trade-off between over-stocking and under-stocking. Behavioral operations management have started to analyse the social and behavioural dynamics involved in the newsvendor problem from the year 2000. Later many researchers have conducted experiments to understand the ordering biases and pricing decisions involved in the area of inventory management. The concept of loss-aversion plays a significant part in the inventory related decisions. This paper presents a detailed examination to understand the influence of loss aversion, prospect theory and reference points on supply chain and related decisions. The systematic review of the existing literature is carried out using the keywords such as newsvendor, loss aversion in inventory management, loss-aversion of newsvendor, experimental studies of inventory management. This review analyses the research progress related to loss aversion and its associated biases on the inventory management problem. This evaluation helps in contributing new insights that will support the researchers and practitioners working in the areas of behavioural economics, experimentation, behavioral operations management, boundedly rational, modelling of newsvendor problem, supply chain practices and contracts. It will also act as a key reference paper to understand the behavioural issues related to the loss-aversion of newsvendor. This paper finds the research gap to highlight on the upcoming research potentials and primacies. This examination confirms the presence of an extensive room for research potential and highlights the specific areas for further research.
With the increase of black swan incidents, cross-border e-commerce supply chains are facing more risks. Out-of-stock aversion and waste aversion are examined as the risk preferences of cross-border e-commerce platforms and overseas warehouses based on prospect theory. A cross-border e-commerce supply chain decision making model with four different risk preference combinations is constructed under the Stackelberg game decision making model. The relationships between the risk preference coefficient and the ordering strategy for the overseas warehouse and the pricing strategy for the cross-border e-commerce platform are analyzed through the numerical analysis of an arithmetic case. The results show that: (1) the cross-border e-commerce platform at the leading position has a more prominent impact on the performance of the cross-border e-commerce supply chain; (2) when the overseas warehouse is out-of-stock averse and the cross-border e-commerce platform is waste averse, both the order quantity and pricing increase with the increase of the risk preference coefficient; when the overseas warehouse is waste averse and the cross-border e-commerce platform is out-of-stock averse, both the order quantity and pricing decrease with the increase of the risk preference coefficient; (3) when the overseas warehouse and the cross-border e-commerce platform have the same risk preference, the overseas warehouse adopts a more aggressive ordering strategy when they are more out-of-stock averse, and adopts a more conservative ordering strategy when they are more waste averse.
The paper studies optimal purchasing policies for buyers in a multi-sourcing problem. For a multi-souring problem, the study first obtains the optimal purchasing policy for a loss-neutral buyer to maximize expected profit. In a multi-sourcing, we find that a loss-neutral buyer could purchase no commodities and can rely only on spot buying to meet the whole market demand if the wholesale price is larger than the spot price. Further, the research finds that a loss-neutral buyer’s optimal purchasing quantity is independent of the retail price. To reveal the loss aversion effect, the study introduces the well-known loss aversion function and obtains the optimal purchasing policy to maximize a loss-averse buyer’s expected utility in a multi-sourcing. To maximize expected utility, it is proven that a loss-averse buyer who becomes more loss-averse should purchase fewer items in the long-term contract. Moreover, under the optimal purchasing policy that maximizes expected utility, a loss-averse buyer’s expected profit is decreasing when the loss aversion coefficient is increasing. If a loss-averse buyer intends to get a bigger expected profit, he/she should be less loss-averse and select an optimal purchasing policy with a smaller loss aversion coefficient.
This paper examines the impact of retailer's risk aversion on the equilibrium strategies and channel coordination in the presence of consumers’ low‐carbon preference. The stochastic market demand is dependent on the carbon reduction level, advertisement for low‐carbon products and their interplay. The mean‐CVaR criterion is adopted to measure the risk‐averse retailer's objective. The Stackelberg equilibrium carbon reduction level, order quantity and advertising level are derived. We find that the manufacturer's investment in carbon reduction can encourage the retailer to put more effort into advertising and increase the order quantity. All of the carbon reduction levels, advertising levels, and order quantity decrease when the retailer becomes conservative. An option and cost‐sharing combined contract is proposed to coordinate the supply chain. We prove that if the trade‐off coefficient (the weight that the retailer puts on expected profit) is higher than a threshold, the supply chain can achieve coordination even though the retailer's degree of risk aversion is extremely high. If the trade‐off coefficient is below the threshold, the supply chain can be coordinated only if the retailer's degree of risk aversion is not very high. The retailer's risk attitude and option price play significant roles in the profit allocation of the supply chain under coordination. Our numerical examples show that the retailer benefits from a higher degree of risk aversion or a higher option price under coordination.
Greenhouse gas is one of the major concerns for policymakers and academicians in the modern era. Renewable energy helps to reduce emissions if the industry supply chain is used optimally. Further, there is little understanding of how renewable energy implementation cost and stock dependence simultaneously impact supply chain (SC) profit. Thus, we propose a duopoly sustainable supply chain considering renewable implementation and stock-dependence demand under uncertain environments. A mathematical model is developed for a sustainable supply chain under three scenarios: (i) Renewable energy effort by manufacturer and cost-shared by the retailer ( Model M ) (ii) Renewable energy effort by retailer and cost-shared by the manufacturer ( Model R ), and (iii) Renewable energy effort by both retailer and manufacturer and cost-shared by the manufacturer and retailer ( Model C ). Nash equilibrium was used to find optimal strategies for players under different integrated channels. The result finds that Model M is comparatively better than the other two models as cost-sharing increases. The result additionally establishes that the total profit decreases as the cost of sharing increases in Model C and Model R, whereas it increases in Model M .
Traditional modeling in supply chain contract analysis shows that a wholesale price contract cannot coordinate a supply chain, whereas a buyback contract can coordinate. In this study, we consider a supply chain involving a risk-neutral supplier and a behavioral retailer under wholesale price and buyback contracts. We characterize the structural properties of the wholesale price contract in a supply chain with a behavioral retailer. Our study reveals that a wholesale price contract can coordinate a supply chain with a behavioral retailer under certain conditions. Under the same conditions, our analysis shows that a buyback contract coordinates the supply chain. Furthermore, we derive the conditions under which a buyback contract will not coordinate a supply chain involving a behavioral retailer. We validate our model with the existing experimental results on supply chain contracts. Finally, we show that a wholesale price contract can outperform a buyback contract in a supply chain having a behavioral retailer.
Purpose
The purpose of this paper is to investigate the pricing strategy and the impact of agents' risk preference in a dual-channel supply chain in which both agents are risk-averse.
Design/methodology/approach
The authors make use of the mean-variance (MV) method to measure the risk aversion of the agents and apply Stackelberg game to obtain the optimal strategies of the proposed models. Furthermore, the authors compare the optimal strategies with that in the benchmark model in which no agent is risk-averse.
Findings
The authors find that the pricing decisions can be divided into four categories according to the risk attitudes of the agents: the decisions that are independent of two agents' risk attitudes, the decisions that depend on only one agent’s risk attitude (i.e. depend on only manufacturer's risk attitude and depend on only retailer's risk attitude) and the decisions that depend on both agents' risk attitudes. In addition, the authors find that the retail price will be lower and the wholesale price in most cases will be lower than that in the benchmark when at least one agent's risk control is effective; the demand will be always increasing as long as one agent's risk control is effective. Furthermore, compared to the benchmark, a win-win strategy (i.e. Pareto improvement) for the supply chain members can be obtained in a certain range where the agents' risk controls are appropriate.
Originality/value
This research provides a theoretical reference for the managers to make the pricing decisions and the risk control in dual-channel supply chains with heterogeneous preference consumers.
Sufficient cash flow and an appropriate capital structure are foundational for the smooth operations of firms. Factoring finance provides an efficient solution for suppliers to fill capital gaps and ensure normal production. Factoring can be provided through either external or internal finance, which are both examined in this study, via factor-led factoring or retailer-led factoring. This study discusses the value of factoring finance to supply chain participants who exhibit loss aversion. Using a game-theoretic approach and equilibrium analysis, we find in each of the factoring schemes that the supplier may choose one of the three following strategies: Strategy N with no liability; Strategy P with partial liability; and Strategy F with full liability. This choice depends primarily on the financing rate and the supplier’s degree of loss aversion. The choice among these strategies also affects the relationship between the retailer’s order quantity and the supplier’s capacity investment. We find that suppliers with low loss aversion prefer retailer-led factoring and that suppliers with high loss aversion have more incentives to adopt factor-led factoring. The loss-averse supplier is more likely to implement Strategy F under retailer-led factoring than under factor-led factoring. The loss-averse supplier tends to invest more capacity under factor-led factoring than under retailer-led finance, while the opposite is the case for the loss-neutral supplier. Our study provides guidelines for supply chain participants in their use of factoring finance to enhance their profits when accounting for both the particular factoring scheme and operational behavior.
We investigate vulnerable supply chain coordination with an option contract in the presence of supply chain disruption risk caused by external and internal disturbances. The supply chain consists of a single risk-neutral supplier and a risk-averse retailer. We characterize the retailer’s order quantity decision under the Conditional Value-at-Risk (CVaR) criterion and the supplier’s production decision. The results show that facing disruption risk and risk-aversion, both the retailer and the supplier would be more prudent to order and produce less than the risk-neutral scenario, inducing damage to the supply chain performance. The number of options purchased is decreasing in disruption risk and the risk-aversion of the retailer. The supplier will increase production as the disruption risk decreases or the shortage penalty increases. When the supplier does not know the risk-aversion of the retailer, the former will produce more and bear a higher overstock risk. We also investigate conditions that facilitate vulnerable supply chain coordination and find that the existence of risk-aversion and disruption risk restrict the option price and exercise price to lower price levels. Finally, we compare the option contract with wholesale price contract from the supplier’s and retailer’s perspectives through a numerical study.
In the literature, different risk criteria are proposed for risk-averse decision-making, but it is often unclear which risk criteria should be used and what their differences may be. This study investigates this problem when a risk-averse, make-to-order firm decides its pricing and sales effort, two factors affecting demand. We consider alternative risk criteria commonly used in the literature, namely expected utility theory (EUT), mean-variance (MV), mean-semideviation (MS), value-at-risk (VaR), conditional value-at-risk (CVaR), and loss aversion (LA). We find that all of these criteria lead to similar qualitative behaviors regarding how risk-/loss-averse decisions deviate from risk-neutral ones. A particularly interesting result is that the form of demand randomness, i.e., additive or multiplicative, can completely reverse the effect of risk/loss aversion in certain cases. We also find that the risk aversion models, i.e., EUT, MV, MS, VaR, and CVaR, are essentially equivalent in inducing the same set of optimal solutions under adverse market states. However, loss aversion is a mild version of risk aversion in that the LA model can only lead to a subset of the solutions generated by other models. These results may not be valid for other applications, such as the newsvendor pricing problem, so we can conclude that the relationship between alternative risk criteria is case-sensitive and should be evaluated more carefully.
At present, the research on relevant decision-making considering the loss risk/ default risk in trade credit is on the rise This paper presents a supply chain model with a risk-averse retailer and a supplier offering loss sharing and trade credit in a supplier-Stackelberg game where the decision variables are the optimal order quantity and loss sharing ratio. The model is analyzed and compared to a newsvendor model without loss sharing and trade credit. Meanwhile, we provide a numerical example and sensitivity analysis to obtain managerial insights. We determine the trend and sensitivity hierarchies between the parameters and the optimal results. The main novelty and contribution of the paper can be demonstrated in two aspects. First, the risk tolerance largely affects the profit of supply chain members, therefore, we incorporate risk-averse parameter into trade credit policy. Second, we incorporate loss sharing into the supplier-Stackelberg game with trade credit for a loss-averse retailer. The findings highlight that for a risk-averse retailer, the supplier can improve the retailer’s utility and its own profits through trade credit and loss sharing.
This paper studies a luxury sporting goods supply chain (LSGSC) experiencing trade disruption and market volatility. We propose a flexible trade credit contract with minimum order quantity (MOQ) and design a coordination mechanism between a supplier and a loss-averse wholesaler. We extend our study to a multi-tiered product setting and examine the impacts of social influences and loss aversion on SC decisions and channel coordination. Given the gloomy post-Covid-19 economic prospects in an era of
reglobalization, this study urges trade associations and business leaders to immunize their SCs by considering behavioral biases and social influences and revisiting their contractual obligations.
In this paper, we study a mobile game supply chain selling a mobile game. We consider two major players in the supply chain: a mobile game developer who develops the mobile game (i.e. supplier) and a mobile game distributor who publishes and sells the mobile game (i.e. retailer). The developer determines its wholesale price and product quality efforts, while the distributor determines its markup and product sale efforts. To this end, we derive the supply chain players’ optimal decisions under a Nash equilibrium. We investigate the impact of effort efficiency on the supply chain player’s optimal pricing and effort decisions. We show that risk aversion may not always lead to conservative supply chain decisions, and risk seeking may not always lead to aggressive decisions. Our analyses indicate that moderate risk-seeking can mitigate double marginalisation in a decentralized supply chain. However, optimal supply chain decisions cannot be made by simply adjusting the supply chain player’s level of risk tolerance.
This paper examines research directions and opportunities in manufacturing logistics based on recommendations from an NSF sponsored workshop, and subsequent efforts by the authors to synthesize, extract and revitalize the vision formed in the workshop. To convey this vision we suggest a taxonomy that characterizes research problems in manufacturing logistics by the physical entities ( systems) involved, the level-of-abstraction, the focus, and the type of decision ( decision scope) intended, and the broader business context (business environment) of which the research can be justified. A main goal of the paper is to envision a broader and richer research base in manufacturing logistics through the explicit consideration of business contexts and technological trends. We argue that these renewed directions for manufacturing logistics research offer opportunities for the OR/MS professionals to exert influence on corporate decision making, and to make direct impact on software innovation.
In this review, we summarize model-based research on contracts in the supply chain setting and provide a taxonomy for work in this area. During our discussions it became clear that the field has developed in many directions at once. Furthermore, as we surveyed the Uterature, it was not obvious what constitutes a contract in this context. While the nomenclature “supply chain management” is relatively new, many of the problems that are addressed are not. In particular, mathematical models for optimizing inventory control have a long history as a significant part of the mainstream of operations research and operations management. Inventory modeling, per se, dates to the early part of the century and the ideas of a Westinghouse engineer named Ford Harris (1915). A natural issue to address first is what is meant by supply chain management (SCM) research and how it relates to the vast body of work constituting classical inventory theory.
Building on agency and prospect theory views, we construct, in this article, a behavioral agency model of executive risk taking. in the model we combine elements of internal corporate governance with problem framing to explain executive risk-taking behavior. The model suggests that executive risk taking varies across and within different forms of monitoring and that agents may exhibit risk-seeking as well as risk-averse behaviors. We develop specific propositions that combine monitoring with performance and the framing of strategic problems to explain executive choices of strategic risk. The resulting propositions enhance and extend the agency-based corporate governance literature on executive risk taking.
In this paper we analyze the impact of supply-side externalities existing among downstream retailers on supply chain performance. Namely, multiple retail firms face stochastic demand, purchase the product from the upstream wholesaler, and make stocking decisions that affect all other retailers in the same echelon. Two sources of inefficiencies exist in such a supply chain: One is double marginalization and the other is externalities among retailers. Whereas double marginalization always leads to inventory understocking at the retail echelon, we find that the implications of externalities are more complex, because different externalities can improve or deteriorate supply chain performance, relative to the situation without externalities.
We show that the effect of externalities depends critically on whether the stocking decisions of retailers exhibit positive (complementarity) or negative (substitutability) externalities, and whether retailers are managed centrally or competitively. Under complementarity, competing retailers tend to understock the product (compared with the centralized inventory management at the retail level), thus aggravating the double-marginalization effect. This is the opposite of what happens under substitutability, where competing retailers tend to overstock the product, thus compensating for the double-marginalization effect. Hence, we conclude that supply chain coordination between retailers and the wholesaler is most important when there is downstream competition that exhibits complementarity. From the wholesaler's point of view, competition among retailers is preferable over centralization of retailers when externalities are negative, and vice versa when externalities are positive. Moreover, with competition on complements, both retailers and the wholesaler have incentives to coordinate the supply chain.
In the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand. If too much is ordered, stock is left over at the end of the period, whereas if too little is ordered, sales are lost. The expected profit-maximizing order quantity is well known, but little is known about how managers actually make these decisions. We describe two experiments that investigate newsvendor decisions across different profit conditions. Results from these studies demonstrate that choices systematically deviate from those that maximize expected profit. Subjects order too few of high-profit products and too many of low-profit products. These results are not consistent with risk-aversion, risk-seeking preferences, Prospect Theory preferences, waste aversion, stockout aversion, or the consequences of underestimating opportunity costs. Two explanations are consistent with the data. One, subjects behave as if their utility function incorporates a preference to reduce ex-post inventory error, the absolute difference between the chosen quantity and realized demand. Two, subjects suffer from the anchoring and insufficient adjustment bias. Feedback and training did not mitigate inventory order errors. We suggest techniques to improve decision making.
Quick Response (QR) is a movement in the apparel industry to shorten lead time. Under QR, the retailer has the ability to adjust orders based on better demand information. We study how a manufacturer-retailer channel impacts choices of production and marketing variables under QR in the apparel industry. Specifically, we build formal models of the inventory decisions of manufacturers and retailers both before and after QR. Our models allow us to address who wins and who loses under QR, and suggest actions such as service level, wholesale price and volume commitments that can be used to make QR profitable for both members of the channel, i.e., Pareto improving. Detailed discussions with a major retailer, and information from industry sources provide supporting evidence for the structure and conclusions of the model.
This paper demonstrates that an important role of intermediaries in supply chains is to reduce the financial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inventory (newsvendor) problem will order less than the expected value maximizing (newsboy) quantity. We show that in such situations a risk neutral distributor can offer a menu of mutually beneficial contracts to the retailers. We show that a menu can be designed to simultaneously: (i) induce every risk averse retailer to select a unique contract from it; (ii) maximize the distributor's expected profit; and (iii) raise the order quantity of the retailers to the expected value maximizing quantity. Thus inefficiency created due to risk aversion on part of the retailers can be avoided. We also investigate the influence of product/market characteristics on the offered menu of contracts.
The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly
large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,”
meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate
their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the
equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios
annually.
Life-cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life-cycle wealth. Previous attempts to test this hypothesis empirically with time-series data have not been supportive; estimated elasticities are typically negative or nonsignificant. Such analyses, however, are vulnerable to measurement error and other estimation problems. We use data on daily observations of wages and hours for New York City cab drivers to estimate the supply response to transitory fluctuations in wages. Cab drivers decide daily how many hours to supply, and face wages that are positively correlated within days, but largely uncorrelated between days. Using these data, our central finding is that wage elasticities are persistently negative–from -.5 to -1 in three different samples–even after correcting for measurement error using instrumental variables. These negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life-cycle formulations of labor supply.
The workhorses of economic analysis are simple formal models that can explain
naturally occurring phenomena. Reflecting this taste, economists often say they
will incorporate more psychological ideas into economics if those ideas can parsimoniously
account for field data better than standard theories do. Taking this
statement seriously, this article describes 10 regularities in naturally occurring
data that are anomalies for expected utility theory but can all be explained
by three simple elements of prospect theory: loss aversion, reflection effects,
and nonlinear weighting of probability; moreover, the assumption is made that
people isolate decisions (or edit them) from others they might be grouped with
(Read, Loewenstein, and Rabin 1999; cf. Thaler, 1999). I hope to show how
much success has already been had applying prospect theory to field data and
to inspire economists and psychologists to spend more time in the wild.
This paper demonstrates that an important role of intermediaries in supply chains is to reduce the financial risk faced by retailers. It is well known that risk averse retailers when faced by the classical single-period inventory (newsvendor) problem will order less than the expected value maximizing (newsboy) quantity. We show that in such situations a risk neutral distributor can offer a menu of mutually beneficial contracts to the retailers. We show that a menu can be designed to simultaneously: (i) induce every risk averse retailer to select a unique contract from it; (ii) maximize the distributor's expected profit; and (iii) raise the order quantity of the retailers to the expected value maximizing quantity. Thus inefficiency created due to risk aversion on part of the retailers can be avoided. We also investigate the influence of product/market characteristics on the offered menu of contracts.
Evidence gathered from large personal lines insurers suggests dissatisfaction with the traditional insurance-to-value requirement. The traditional requirement may not fully remove the incentive to underinsure which is present in nearly all property insurance contracts. Underinsuring is regarded as a major problem by insurers because it adversely affects their costs. Alternatives to the traditional insurance-to-value requirement are examined in the light of their effectiveness as loss-sharing devices and their effect on costs and incentives.
Over the last decade, the third-party logistics (3PL) market has experienced a growing pain with constant market shifts. As the 3PL market shifts, there is an increasing need to identify where growth in the 3PL market comes from. The growth potential may include the expansion of services to current customers and the expansion of customer bases through globalisation of service offerings. In particular, freight bill auditing and payment have often been regarded as the area where the highest growth potential exists. To verify such a premise, we conducted an empirical study based on a questionnaire survey of the potential 3PL users. This paper reports the survey findings and identifies key imperatives for successful development of 3PL market growth plans.
Supply chain management deals with the management of material, information, and financial flows in a network consisting of vendors, manufacturers, distributors and customers. Managing flows in this network is a major challenge due to the complexity (in space and time) of the network, the proliferation of products (often with short life cycles) that flow through this network, and the presence of multiple decision makers who each own and operate a piece of this network and optimize a private objective function. Supply chain management clearly involves a variety of issues including product/process design, production, third party logistics and outsourcing, supplier contracting, incentives and performance measures, multi-location inventory coordination, etc.
Traditionally, fashion products have incurred high losses due to stockouts and inventory obsolence because long lead times coupled with a concentrated selling season force all or at least most production to be committed before demand information is available. Under a quick response system, lead times are shortened sufficiently to allow a greater portion of production to be scheduled in response to initial demand. We model and analyze the decisions required under quick response and give a method for estimating the demand probability distributions needed in our model. We applied these procedures with a major fashion skiwear firm and found that cost relative to the current informal response system was reduced by enough to increase profits by 60%. Relative to the cost that would have been incurred if no response were used, optimized response reduces cost by enough to roughly quadruple profits.
This chapter reviews the supply chain coordination with contracts. Numerous supply chain models are discussed. In each model, the supply chain optimal actions are identified. The chapter extends the newsvendor model by allowing the retailer to choose the retail price in addition to the stocking quantity. Coordination is more complex in this setting because the incentives provided to align one action might cause distortions with the other action. The newsvendor model is also extended by allowing the retailer to exert costly effort to increase demand. Coordination is challenging because the retailer's effort is noncontractible—that is, the firms cannot write contracts based on the effort chosen. The chapter also discusses an infinite horizon stochastic demand model in which the retailer receives replenishments from a supplier after a constant lead time. Coordination requires that the retailer chooses a large basestock level.
We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.
We consider a simple supply-chain contract in which a manufacturer sells to a retailer facing a newsvendor problem and the lone contract parameter is a wholesale price. We develop a mild restriction satisfied by many common distributions that assures that the manufacturer's problem is readily amenable to analysis. The manufacturer's profit and sales quantity increase with market size, but the resulting wholesale price depends on how the market grows. For the cases we consider, we identify relative variability (i.e., the coefficient of variation) as key: As relative variability decreases, the retailer's price sensitivity decreases, the wholesale price increases, the decentralized system becomes more efficient (i.e., captures a greater share of potential profit), and the manufacturer's share of realized profit increases. Decreasing relative variability, however, may leave the retailer severely disadvantaged as the higher wholesale price reduces his profitability. We explore factors that may lead the manufacturer to set a wholesale price below that which would maximize her profit, concentrating on retailer participation in forecasting and retailer power. As these and other considerations can result in a wholesale price below what we initially suggest, our base model represents a worst-case analysis of supply-chain performance.
The principal-agent paradigm, in which a principal has a primary stake in the performance of some system but delegates operational control of that system to an agent, has many natural applications in operations management (OM). However, existing principal-agent models are of limited use to OM researchers because they cannot represent the rich dynamic structure required of OM models. This paper formulates a novel dynamic model that overcomes these limitations by combining the principal-agent framework with the physical structure of a Markov decision process. In this model one has a system moving from state to state as time passes, with transition probabilities depending on actions chosen by an agent, and a principal who pays the agent based on state transitions observed. The principal seeks an optimal payment scheme, striving to induce the actions that will maximize her expected discounted profits over a finite planning horizon. Although dynamic principal-agent models similar to the one proposed here are considered intractable, a set of assumptions are introduced that enable a systematic analysis. These assumptions involve the "economic structure" of the model but not its "physical structure." Under these assumptions, the paper establishes that one can use a dynamic-programming recursion to derive an optimal payment scheme. This scheme is memoryless and satisfies a generalization of Bellman's principle of optimality. Important managerial insights are highlighted in the context of a two-state example called "the maintenance problem".
A returns policy, which specifies a schedule of rebates from manufacturer to retailer for product left over at the end of the selling season, encourages larger order quantities and can increase manufacturer profit. One downside from a manufacturer's perspective is the possibility of very low profit due to high rebate expense when demand is lower than expected. We take the viewpoint of a manufacturer selling a short life-cycle product to a single risk-neutral retailer and describe returns policies that, when compared to no returns, satisfy two conditions: (1) the retailer's expected profit is increased and (2) the manufacturer's profit is at least as large as when no returns are allowed. We call such a returns policy risk-free.
A channel rebate is a payment from a manufacturer to a retailer based on retailer sales to end consumers. Two common forms of channel rebates are linear rebates, in which the rebate is paid for each unit sold, and target rebates, in which the rebate is paid for each unit sold beyond a specified target level. When demand is not influenced by sales effort, a properly designed target rebate achieves channel coordination and a win-win outcome. Coordination cannot be achieved by a linear rebate in a way that is implementable. When demand is influenced by retailer sales effort, a properly designed target rebate and returns contract achieves coordination and a win-win outcome. Other contracts, such as linear rebate and returns or target rebate alone, cannot achieve coordination in a way that is implementable. Contrary to the view expressed in the literature that accepting returns weakens incentives for retailer sales effort, we find that the provision of returns strengthens incentives for effort.
We examine the problem of developing supply contracts that encourage proper coordination of forecast information and production decisions between a manufacturer and distributor of high fashion, seasonal products operating in a two-mode production environment. The first production mode is relatively cheap but requires a long lead time while the second is expensive but offers quick turnaround. We focus on contracts of the form (w<sub>1</sub>, w<sub>2</sub>, b) where w<sub>i</sub> is the wholesale price offered for production mode i and b is a return price offered for items left over at the end of the season. We find that such a contract can coordinate the manufacturer and distributor to act in the best interest of the channel. The pricing conditions needed to ensure an efficient solution vary depending on the degree of demand forecast improvement between periods and the manufacturer's access to forecast information. We also examine whether these conditions ensure a Pareto optimal solution with respect to two traditional production settings.
Previous results on nonlinear risk-return associations, predicted by prospect theory, are replicated with mean quadratic differences instead of variance as a measure of risk. In contrast to assumptions of these studies, results with a sample from the COMPUSTAT-database provide evidence that at least a minority of firms shift to individual reference levels, which are represented here through levels of minimal risk. Further, changes of environmental conditions as an alternative explanation for switching risk-return relationships are tested against prospect theory predictions. It is shown that risk-return relationships remain stable as long as the relative position to the individual reference level is stable. This explains switching risk-return relationships better than changing environmental conditions.
Manufacturers often use returns policies to encourage retailers to stock and price items more aggressively. We focus on the effect that such policies have on both a retailer's and a manufacturer's profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item. Such a commitment is often necessary for retailers who sell primarily through catalogues.
This paper considers the pricing decision faced by a producer of a commodity with a short shelf or demand life. A hierarchical model is developed, and the results of the single period inventory model are used to examine possible pricing and return policies. The paper shows that several such policies currently in effect are suboptimal. These include those where the manufacturer offers retailers full credit for all unsold goods or where no returns of unsold goods are permitted. The paper also demonstrates that a policy whereby a manufacturer offers retailers full credit for a partial return of goods may achieve channel coordination, but that the optimal return allowance will be a function of retailer demand. Therefore, such a policy cannot be optimal in a multi-retailer environment. It is proven, however, that a pricing and return policy in which a manufacturer offers retailers a partial credit for all unsold goods can achieve channel coordination in a multi-retailer environment.
This article was originally published in Marketing Science, Volume 4, Issue 2, pages 166–176, in 1985.
This paper considers the pricing decision faced by a producer of a commodity with a short shelf or demand life. A hierarchical model is developed, and the results of the single period inventory model are used to examine possible pricing and return policies. The paper shows that several such policies currently in effect are suboptimal. These include those where the manufacturer offers retailers full credit for all unsold goods or where no returns of unsold goods are permitted. The paper also demonstrates that a policy whereby a manufacturer offers retailers full credit for a partial return of goods may achieve channel coordination, but that the optimal return allowance will be a function of retailer demand. Therefore, such a policy cannot be optimal in a multi-retailer environment. It is proven, however, that a pricing and return policy in which a manufacturer offers retailers a partial credit for all unsold goods can achieve channel coordination in a multi-retailer environment. This article was originally published in , Volume 4, Issue 2, pages 166–176, in 1985.
Although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior, little formal theoretical work had been undertaken to date. This paper incorporates reference price effects into the traditional economic theory of consumer choice, and examines the effects of reference price formation on the results of the traditional theory, its marketing implications, and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior. Several implications of the theoretical model are empirically tested using weekly retail egg sales data from Southern California. This analysis indicates that reference price formation does have significant effects on consumer behavior. Furthermore, these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases.
A new sample of 85 industries (about 3,300 firms) defined in terms of homogenous products provides strong evidence that prospect theory can explain the tradeoff between two of the most researched parameters in evaluating organizations, namely, risk and return. In particular, organizations below their target level are found to be risk-takers (H1) while organizations above their target level are risk-averters (H2); moreover, the below target tradeoff was generally steeper than the above target with a median below to above slope ratio of about 3:1 (H3).
Life-cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages.
We tested this prediction using three samples of wages and hours of New York City cabdrivers, whose wages are correlated within
days but uncorrelated between days. Estimated wage elasticities are significantly negative in two out of three samples. Elasticities
of inexperienced drivers average approximately −1 and are less than zero in all three samples (and significantly less than
for experienced drivers in two of three samples). Our interpretation of these findings is that cabdrivers (at least inexperienced
ones): (i) make labor supply decisions “one day at a time” instead of intertemporally substituting labor and leisure across
multiple days, and (ii) set a loose daily income target and quit working once they reach that target.
This article studies the allocation of responsibility for unsold inventory, provision for which is made in practically every distribution contract. The two extreme cases are the consignment contract, which allocates all the burden to the manufacturer, and the no-return contract, in which retailers purchase the merchandise outright and assume responsibility for unsold inventory. Contract choices are shown to vary across countries, industries, products and types of transactions. The article identifies six main factors affecting this choice: optimal inventory policy in a stochastic retail demand environment, relative advantage in disposing of the unsold inventory, optimal risk allocation, incentives to invest in promotions and provide services to increase consumer demand, information asymmetry, and costs associated with the consignment contract per se. Several testable implications are presented and the choice of contracts in the publishing industry is shown to be consistent with the predictions of the model. Copyright 1996 by the University of Chicago.
Data from downtown Boston in the 1990s show that loss aversion determines seller behavior in the housing market. Condominium
owners subject to nominal losses 1) set higher asking prices of 25–35 percent of the difference between the property's expected
selling price and their original purchase price; 2) attain higher selling prices of 3–18 percent of that difference; and 3)
exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owneroccupants as investors,
but hold for both. These findings suggest that sellers are averse to realizing (nominal) losses and help explain the positive
price-volume correlation in real estate markets.
This paper argues that the macroeconomically interesting features of inventory behavior are well captured by a model in which firms face only demand uncertainty with a nonnegativity constraint on inventories. Empirical implications of the "stockout-avoidance" model of inventory behavior are derived and then tested on disaggregated automobile industry data. The results largely support the model, though they suggest a small role for production-smoothing as well. Subsidiary evidence on the relative variance of demand and cost shocks suggests that demand shocks are indeed more important. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
The significant growth in the volume of trade on the large value interbank payment systems and the concomitant massive increase in intraday overdrafts have raised serious concerns about the ability of existing payment systems to allow central banks to cope with wide scale disturbances and to provide proper incentives for private institutions. This paper studies whether these concerns are warranted and emphasizes the inadequacy of the compartmentalization of research done on prudential rules and payment systems. It develops an analytical framework in which the various conceivable payment systems can be studied. The analytical framework suggests the possibility of safeguarding the flexibility of interbank mutual overdraft facilities while improving current systems through three measures: i) a reinterpretation of bilateral debit caps as bilateral credit lines, so as to escape the rigidity of the "double coincidence of wants", ii) the use of a broader definition of mutual overdraft facilities encompassing other forms of short-term lending between banks, and iii) a centralization of the bilateral credit lines and transactions in a gross payment system, so as to allow the central bank to better monitor positions and to avoid being forced to intervene to prevent systemic risk.
Data from downtown Boston in the 1990s show that loss aversion determines seller behaviour in the housing market. Condominium owners subject to nominal losses: (1) set higher asking prices of 25-35% of the difference between the property’s expected selling price and their original purchase price; (2) attain higher selling prices of 3-18% of that difference; and (3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owner-occupants as for investors, but hold for both. These findings are consistent with prospect theory and help explain the positive price-volume correlation in real estate markets.
We propose a model of consumption and saving based on Kahneman and Tversky's Prospect Theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption. When there is sufficient income uncertainty, a person resists lowering consumption in response to bad news about future income. This resistance is greater than the resistance to increasing consumption in response to good news. We present empirical evidence from five countries that confirms this behavior.
A new theory of cardinal utility, with an associated set of axioms, is presented. It is a generalization of the von Neumann-Morgenstern expected utility theory, which permits the analysis of phenomena associated with the distortion of subjective probability.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
: Because psychology systematically explores human judgment, behavior, and well-being, it can teach us important facts about how humans differ from traditional economic assumptions. In this essay I discuss a selection of psychological findings relevant to economics. Standard economics assumes that each person has stable, well-defined preferences, and that she rationally maximizes those preferences. Section 2 considers what psychological research teaches us about the true form of preferences, allowing us to make economics more realistic within the rationalchoice framework. Section 3 reviews research on biases in judgment under uncertainty; because those biases lead people to make systematic errors in their attempts to maximize their preferences, this research poses a more radical challenge to the economics model. The array of psychological findings reviewed in Section 4 points to an even more radical critique of the economics model: Even if we are willing to modify our familia...
We're grabbing market share
- Spiegel R.
Spiegel, R. (2002). We're grabbing market share. Electronic News, 48(35), 22.
Manufacturers, retailers make profitable partners: Both sides share in risks, responsibilities to enhance merchandising effort
- Leccese D.
Leccese, D. (1993). Manufacturers, retailers make profitable partners: Both sides
share in risks, responsibilities to enhance merchandising effort. Playthings,
91(11), 30-33, 56-59.