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Price and service competition of supply chains with risk-averse retailers under demand uncertainty

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  • Xiao, Tiaojun
  • Yang, Danqin

Abstract

We develop a price-service competition model of two supply chains to investigate the optimal decisions of players under demand uncertainty. Each supply chain consists of one risk-neutral supplier and one risk-averse retailer. We analyze the effects of the retailers' risk sensitivity on the players' optimal strategies. We find that the higher the risk sensitivity of one retailer, the lower his optimal service level and retail price will be, while the effects of the rival's risk sensitivity on his decisions depend on the substitutability of the two products. The optimal wholesale price of one supplier is first increasing and then decreasing with the risk sensitivity of the two retailers if the substitutability is sufficiently low, otherwise decreasing with the risk sensitivity. The expected equilibrium order quantity of one retailer is often increasing with his risk sensitivity. We also study the effects of the wholesale prices and the service investment efficiencies on the retail price-service level decisions of the retailers. We find that the higher the service investment efficiency of one retailer, the lower the optimal retail price and service level of his rival will be.

Suggested Citation

  • Xiao, Tiaojun & Yang, Danqin, 2008. "Price and service competition of supply chains with risk-averse retailers under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 114(1), pages 187-200, July.
    • Handle: RePEc:eee:proeco:v:114:y:2008:i:1:p:187-200
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