Channel bargaining with risk-averse retailer

Abstract We first consider a supply chain with one manufacturer and one retailer where there is only one product with stochastic demand. The retailer is risk averse with Conditional Value-at-Risk (CVaR) as her risk measure and the manufacturer is a risk-neutral agent. We model the problem as a Nash-bargaining problem where the manufacturer and the retailer negotiate about the wholesale price and order quantity. We show that there exists a Nash-bargaining equilibrium for the wholesale price and order quantity with equal and unequal bargaining power. We also find that even for the equal bargaining power between the two agents, the retailer's bargaining power for the supply chain profit increases as she becomes more risk averse. We then extend the model to the case where demand is endogenous and can be manipulated by setting the retail price. We show that there exists a Nash-bargaining equilibrium for the wholesale price, retail price and the order quantity under equal bargaining power.

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