Ordering and pricing model of risk-averse retailer under Exchange Rate and Demand Uncertainties

Under exchange-rate and demand uncertainties, this paper studied the optimal ordering and pricing decision of a risk-averse retailer who served by two suppliers, one foreign supplier and one domestic supplier. We developed a model with mean-variance utility function to describe the retailer´s risk aversion. After that we analyzed the impact of the two risks upon the optimal order quantities and retail price. The results show that when the retailer orders from both of the two suppliers, the order quantity from foreign supplier is a constant number, which is only associated with the mean value and variance of exchange rate; while the order quantity from domestic supplier is just a complement to the gross quantity, which is only associated with the distribution form and characteristic value of demand. Finally, we conducted a numerical study to investigate the effect of demand risk on the optimal order quantities and retail price through comparative static analysis.