Research on Buy-Back Contract for Supply Chain Coordination with Prospect Theory

By adopting the prospect theory, this paper explores how loss aversion influences suppliers´ buyback policies when retailers are loss-averse. Specifically, this paper examines how buyback contract coordinates a supply chain, which consists of one loss-averse retailer and one risk-neutral supplier with stock losses. Research models in centralized setting and decentralized solution are proposed and a numerical example is provided to illustrate the models. The results of the example indicate that manufacturers can adjust their wholesale prices and formulate different buy-back coefficients to eliminate double marginalization caused by decentralized decision-making when retailers have different level of loss aversion. In other words, when retailers have subtle loss aversion, buy-back contract can coordinate supply chains.