Optimal Ordering and Pricing Policies for Seasonal Products: Impacts of Demand Uncertainty and Capital Constraint

With a stochastic price-dependent market demand, this paper investigates how demand uncertainty and capital constraint affect retailer’s integrated ordering and pricing policies towards seasonal products. The retailer with capital constraint is normalized to be with zero capital endowment while it can be financed by an external bank. The problems are studied under a low and high demand uncertainty scenario, respectively. Results show that when demand uncertainty level is relatively low, the retailer faced with demand uncertainty always sets a lower price than the riskless one, while its order quantity may be smaller or larger than the riskless retailer’s which depends on the level of market size. When adding a capital constraint, the retailer will strictly prefer a higher price but smaller quantity policy. However, in a high demand uncertainty scenario, the impacts are more intricate. The retailer faced with demand uncertainty will always order a larger quantity than the riskless one if demand uncertainty level is high enough (above a critical value), while the capital-constrained retailer is likely to set a lower price than the well-funded one when demand uncertainty level falls within a specific interval. Therefore, it can be further concluded that the impact of capital constraint on the retailer’s pricing decision can be influenced by different demand uncertainty levels

Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches

The legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation and incentive compatibility constraints of the signatories. Considering loss-averse players, we have calculated optimal penalties in a supply chain contract and compared those with the liquidated damages. Two possible breaches are considered – a breach in quality of the delivery and a breach in the process. In the absence of any penalty, a process breach reduces the supplier’s delivery risk and cost of delivery. Determining the parametric conditions for efficient contracts, numerically we show the effects of various variables on the zone of efficient contract. We show that the optimal penalties need not be excessive compared to the liquidated damages

Coordinating a Supply Chain with a Loss-Averse Retailer under Yield and Demand Uncertainties

This paper investigates the channel coordination of a supply chain (SC) consisting of a loss-averse retailer and a risk-neutral supplier under yield and demand uncertainties. Three existing contracts are analyzed. Our results demonstrate that the buyback (BB) and quantity flexibility (QF) contracts can not only coordinate the supply chain but also lead to Pareto improvement for each player, while the wholesale price (WP) contract fails to coordinate the chain due to the effects of double marginalization and risk preference. For comparison, a chain with a risk-neutral retailer is also analyzed. Furthermore, numerical examples are provided to demonstrate the effectiveness of the coordination contracts, and the impacts of loss aversion and random yield on the decision-making behaviors and system performance are then discussed