Channel coordination with a loss-averse retailer and option contracts

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

141 Scopus Citations
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Original languageEnglish
Pages (from-to)52-57
Journal / PublicationInternational Journal of Production Economics
Online published12 Dec 2013
Publication statusPublished - Apr 2014


We investigate a one-period two-echelon supply chain composed of a risk-neutral supplier that produces short life-cycle products and a loss-averse retailer that orders from the supplier via option contracts and sells to end-users with stochastic demand in the selling season. When a single retail season begins, the retailer can obtain goods by purchasing and exercising call options. We derive the loss-averse retailer's optimal ordering policy and the risk-neutral supplier's optimal production policy under these conditions. In addition, we find that the loss-averse retailer may order less than, equal to, or more than the risk-neutral retailer. Further, we show that the loss-averse retailer's optimal order quantity may increase in retail price and decrease in option price and exercise price, which is different from the case of a risk-neutral retailer. Finally, we study coordination of the supply chain and show that there always exists a Pareto contract as compared to the non-coordinating contracts. © 2013 Elsevier B.V.

Research Area(s)

  • Finance-operations-interface, Loss aversion, Option contracts, Supply chain coordination, Supply chain management