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Loss-averse preferences in a two-echelon supply chain with yield risk and demand uncertainty

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  • Shaofu Du

    (University of Science and Technology of China)

  • Yujiao Zhu

    (University of Science and Technology of China)

  • Tengfei Nie

    (University of Science and Technology of China)

  • Haisuo Yu

    (University of Science and Technology of China)

Abstract

We consider a one-period two-echelon supply chain composed of a loss-averse supplier with yield randomness and a loss-averse retailer with demand uncertainty. At the beginning of the selling season, the retailer orders from the supplier via the wholesale price contract, and then the supplier makes his production decision. We derive the loss-averse retailer’s optimal ordering policy and the loss-averse supplier’s optimal production policy under these conditions. In addition, we discuss the effect of loss aversion on both parties’ decision making and show how loss aversion contributes to decision bias. Furthermore, we find that the loss-averse retailer’s optimal order quantity may increase in wholesale price and decrease in retail price which is differ from the risk-neutral case where the optimal order quantity is always decreasing in wholesale price and increasing in retail price. Finally, numerical examples are presented to illustrate how loss aversion and yield variance contribute to the supply chain performance.

Suggested Citation

  • Shaofu Du & Yujiao Zhu & Tengfei Nie & Haisuo Yu, 2018. "Loss-averse preferences in a two-echelon supply chain with yield risk and demand uncertainty," Operational Research, Springer, vol. 18(2), pages 361-388, July.
  • Handle: RePEc:spr:operea:v:18:y:2018:i:2:d:10.1007_s12351-016-0268-3
    DOI: 10.1007/s12351-016-0268-3
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    Cited by:

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    3. Song, Zhuzhu & Tang, Wansheng & Zhao, Ruiqing & Zhang, Guoqing, 2021. "Inventory strategy of the risk averse supplier and overconfident manufacturer with uncertain demand," International Journal of Production Economics, Elsevier, vol. 234(C).
    4. Zhen Li & Jia Zhao & Qingfeng Meng, 2022. "Dual-channel recycling e-waste pricing decision under the impact of recyclers’ loss aversion and consumers’ bargaining power," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(10), pages 11697-11720, October.
    5. Zhongwei Feng & Chunqiao Tan, 2019. "Pricing, Green Degree and Coordination Decisions in a Green Supply Chain with Loss Aversion," Mathematics, MDPI, vol. 7(3), pages 1-25, March.
    6. Wei Liu & Shiji Song & Ying Qiao & Han Zhao, 2020. "Supply Chain Coordination with a Loss-Averse Retailer and Combined Contract," Mathematics, MDPI, vol. 8(4), pages 1-20, April.
    7. Wang, Daao & Dimitrov, Stanko & Jian, Lirong, 2020. "Optimal inventory decisions for a risk-averse retailer when offering layaway," European Journal of Operational Research, Elsevier, vol. 284(1), pages 108-120.
    8. Bengang Gong & Xuan Xia & Jinshi Cheng, 2020. "Supply-Chain Pricing and Coordination for New Energy Vehicles Considering Heterogeneity in Consumers’ Low Carbon Preference," Sustainability, MDPI, vol. 12(4), pages 1-14, February.
    9. Wei Liu & Shiji Song & Ying Qiao & Han Zhao & Huachang Wang, 2020. "The Loss-Averse Newsvendor Problem with Random Yield and Reference Dependence," Mathematics, MDPI, vol. 8(8), pages 1-15, July.
    10. Wentao Yi & Zhongwei Feng & Chunqiao Tan & Yuzhong Yang, 2021. "Green Supply Chain Management with Nash Bargaining Loss-Averse Reference Dependence," Mathematics, MDPI, vol. 9(24), pages 1-26, December.
    11. Cai, Jianhu & Hu, Xiaoqing & Jiang, Feiying & Zhou, Qing & Zhang, Xiaoyang & Xuan, Liyuan, 2019. "Optimal input quantity decisions considering commitment order contracts under yield uncertainty," International Journal of Production Economics, Elsevier, vol. 216(C), pages 398-412.

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