Inverse-S Shaped Weighting Function in a Two Stage Supply Chain

Studies of behavioral economics show that people are not perfectly rational but always behave with risk attitudes,one of which is that they possibly overweigh low-probability events and underweigh high-probability events.This risk attitude is generally expressed by an inverse S-shaped weighting function.This paper considers a two stage supply chain with a retailer who faces a constant demand,and a supplier who is subject to random yield risk.The retailer decides order quantities from the supplier,with which the supplier decides production quantities.We use Stackelberg game to model the problem and obtain the optimal decisions for both retailer and supplier.We incorporate an inverse S-shaped weighting function into the model construct and discuss risk attitudes of the retailer and the supplier respectively.By comparing risk-averse models with the risk-neutral model,we observe that the supplier chain is conditionally coordinated in risk-averse models,while it cannot be coordinated in risk-neutral model.We also present numerical examples to clearly illustrate this observation.