Supply chain coordination with loss-averse agents under a returns policy

Supply chain coordination with both a loss-averse retailer and loss-averse supplier under a returns policy is studied. The objective of each supply chain agent is to maximize the expected utility. A returns policy is applied for channel coordination and mitigating loss aversion. The necessary and sufficient conditions for the optimal returns price are identified. In particular, it is shown that a returns policy can´t always coordinate the supply chain and its coordination depends on how the difference between the loss aversions of the supplier (as a supply chain coordinator) and the retailer is. Numerical studies are conducted and managerial insights are developed.