Coordination of a supply chain with loss-averse consumers in service quality

We develop a two-period game model to study the coordination mechanism for a supply chain with loss-averse consumers who are assumed to have dwindling sensitivity to service quality gain relative to loss. We find that all-unit quantity discount coupling with service subsidy rate can coordinate the retailer’s price and service quality decisions together in each period. When consumers become more loss-averse in service quality, the coordinated wholesale price in the first period might increase; whereas that in the second period decreases. With Pareto coordination mechanism, larger loss-aversion might weaken the supplier’s bargaining power. We provide managerial insights on how to adjust the coordinated contract when the consumers’ loss-aversion and reference value of service quality level change.