Optimal Decisions Of A Supply Chain With Loss-aversion Under Option Contracts

The competition among enterprises in today’s world is largely expressed as the competition of supply chain,and the science of supply chain decision making has become more and more important for enterprises.To reduce the multi-source risks faced by supply chains(demand uncertainty,random yield,price uncertainty,etc.),option contracts have been successfully used in supply chain management practices.However,with the development of behavioral psychology,the decision irrationality caused by loss-averse behavior has posed new challenges to supply chain management,and more and more scholars have begun to pay attention to the study of loss-averse supply chains under option contracts,but most of the existing studies only consider the existence of loss aversion in a single decision maker,but less consider the situation where both decision makers have loss-averse behavior.Therefore,it is of practical significance to study the operation and decision making of supply chains under option contracts where both decision makers have loss-averse behavior,for the scientificity of decision making of manufacturers as well as suppliers.In this paper,we consider a two-level supply chain consisting of a single loss-averse manufacturer and a single loss-averse supplier,where the market demand as well as the supplier’s output are uncertain and there is a spot market that can provide products for both parties.By constructing a decision model of the supply chain under call option,put option,and two-way option contracts,respectively,we systematically investigate the impact of lossaverse behavior on firms’ decisions under bilateral stochastic situations of output and demand.The main research components and findings are as follows:I.Supply chain management decisions considering decision makers’ loss aversion under a call option contract are investigated.It is shown that an increase in the level of loss aversion of both the manufacturer and the supplier leads to a decrease in the expected utility of both parties,while the option purchase price and the exercise price have a similar impact on the manufacturer,but the impact on the supplier varies depending on the contract parameters.II.Supply chain management decisions considering loss aversion of decision makers under a put option contract are investigated.It is shown that the increase in the level of loss aversion and the related price parameter affects the manufacturer’s ordering strategy differently but ultimately leads to a decrease in the manufacturer’s expected utility;while for the supplier,the trend of expected utility is affected not only by its own level of loss aversion and the related price parameter,but also by the manufacturer’s level of loss aversion.III.Supply chain management decisions considering decision makers’ loss aversion under two-way option contracts are examined and compared with the findings under call option contracts.It is shown that the optimal expected utility of the manufacturer is higher when using two-way options than when using call options regardless of the level of loss aversion and the price of the option contract,while for the supplier,both option contracts have advantages and disadvantages under different contract parameters.