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Three-echelon supply chain coordination with a loss-averse retailer and revenue sharing contracts

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  • Hu, Benyong
  • Meng, Chao
  • Xu, Dong
  • Son, Young-Jun

Abstract

This paper studies supply chain coordination via revenue sharing contracts in two different supply chain structures. First, for a three-echelon supply chain with a loss-averse retailer, a loss-neutral distributor, and a loss-neutral manufacturer, we derive the three players’ optimal policies, and find that compared with a loss-neutral scenario, the loss-averse retailer gains fewer profits and a lower utility. Additionally, compared with the loss-neutral scenario, the loss-averse retailer orders less when it faces a high overage cost and orders more when it faces a high shortage cost. Second, for a two-echelon supply chain consisting of a loss-averse retailer and a loss-neutral distributor, we provide the two players’ optimal policies. Third, we derive coordination conditions for the two supply chain structures, and quantify the differences between the three-echelon supply chain and the two-echelon supply chain. Furthermore, we find that Pareto improvement can be achieved under revenue sharing contracts.

Suggested Citation

  • Hu, Benyong & Meng, Chao & Xu, Dong & Son, Young-Jun, 2016. "Three-echelon supply chain coordination with a loss-averse retailer and revenue sharing contracts," International Journal of Production Economics, Elsevier, vol. 179(C), pages 192-202.
    • Handle: RePEc:eee:proeco:v:179:y:2016:i:c:p:192-202
    DOI: 10.1016/j.ijpe.2016.06.001
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    References listed on IDEAS

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