Supply Chain Performance with a Downside-Risk-Averse Retailer and Strategic Customers

Abstract

Predicting future promotion information on markdowns, customers can maximize their utilities by deciding when to buy. With this strategic behavior, this paper investigates a downside-risk-averse retailer’s integrated stock and pricing problem using a single case study method. Analyzing effects of the downside risk aversion and strategic customers is our purpose. By exploring a two-phase newsvendor model with a retailer selling to strategic customers, our work determines the downside-risk-averse retailer’s equilibrium ordering level and selling price. On this basis, effects of the downside risk aversion and the strategic behavior on the retailer’s optimum decisions and profit are analyzed. We find that the reverse effect of the strategic behavior can be mitigated by the retailer’s downside risk constraint. We also extend the model to a decentralized supply chain case. It is found that a low (high) downside risk aversion would mean that the supply chain profit in the decentralized case can (cannot) dominate the centralized under some (any) wholesale price contracts when customers are strategic. In addition, for different risk aversions, we also construct contracts to optimize the supply chain profit. Our results will provide reference evidence of making operational management decisions for the downside-risk-averse retailer in the case of strategic customers.