Optimal Ordering and Disposing Policies in the Presence of an Overconfident Retailer: A Stackelberg Game

Abstract

This paper investigates the impact of the retailer’s overconfident behavior on supply chain performance. We start with a basic model on the rational newsvendor model and investigate the retailer’s optimal ordering decision and expected profit. Next, we extend the basic model and introduce an overconfident retailer. We find that the retailer’s overconfident behavior does not necessarily damage the supply chain compared with the basic model when the overconfident level does not exceed a threshold. We also design the cooperation and buyback mechanism and conduct numerical analysis to compare the manufacturer’s and retailer’s expected profits and real profits with those in the basic newsvendor model. It can achieve Pareto improvement in the supply chain when the overconfident level is low. When the retailer’s overconfident level exceeds a threshold, the retailer’s ordering decision cannot make the whole supply chain sustainable development.

Effect of fairness and overconfidence on pricing strategy of substitute bundles in a two-echelon supply chain

“…The result indicates that under two information states, the retailer with overconfidence behaviour has a higher effort extent and lower wholesale price than the rational retailer. Wang et al [41] investigated the impact of the overconfidence behaviour of retailer on the SC and noticed that unless the level of overconfidence exceeds a threshold, the SC is not much affected compared to the basic model. Considering uncertain demand, Zhang et al [46] examined the influence of retailer's overconfidence preference on an SC consisting of a rational manufacturer, one rational retailer, and one overconfident retailer.…”