Buyback contract under asymmetric information about retailer’s loss aversion nature

We consider a two-echelon supply chain with a risk neutral manufacturer and a loss-averse retailer. The type of loss aversion of the retailer is considered to be a private information of the retailer. Loss aversion often leads to the situation of the retailer buying below the estimated sales, which deprives the manufacturer of his market share. To offset this issue, we propose a contract design which the manufacturer offers to the retailer. We show that the contract ensures the loss averse retailer, while at the same time, it increases the manufacturer’s market share, thus creating a win–win situation for both the manufacturer and the retailer.

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