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Customer and retailer rebates under risk aversion

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  • Caliskan-Demirag, Ozgun
  • (Frank) Chen, Youhua
  • Li, Jianbin

Abstract

In a supply chain setting, we analyze a manufacturer's customer and retailer rebates, which are sales incentives offered to the end buyers and retailers, respectively. The performance of both rebates is influenced by the retailer's objective and response to the promotion due to his intermediary position in the channel. Earlier studies investigating rebates in distribution channels have traditionally assumed that the retailer is risk neutral with the objective of maximizing expected profits. In our paper, we consider a risk-averse retailer. We formally model risk aversion by adopting the Conditional-Value-at-Risk (CVaR) decision criterion. Using a stochastic and (effective) price dependent demand, we analyze the manufacturer's rebate amount decisions and the retailer's joint inventory and pricing decisions in a game theoretical framework. We provide several structural properties of the objective functions and show monotonicity of the retailer's decisions in the degree of risk aversion. For the case of retailer rebates, we characterize the unique equilibrium, and for the case of customer rebates, we prove the existence of an equilibrium. Using numerical examples, we provide further insights on the impact of risk aversion. For example, given an exogenous wholesale price, we observe a threshold value on the retailer's risk-aversion parameter below (above) which the manufacturer is better off with retailer rebates (customer rebates); implying that the manufacturer's preferred rebate type can be different depending on whether the retailer is risk neutral or sufficiently risk averse.

Suggested Citation

  • Caliskan-Demirag, Ozgun & (Frank) Chen, Youhua & Li, Jianbin, 2011. "Customer and retailer rebates under risk aversion," International Journal of Production Economics, Elsevier, vol. 133(2), pages 736-750, October.
  • Handle: RePEc:eee:proeco:v:133:y:2011:i:2:p:736-750
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Xue, Weili & Ma, Lijun & Shen, Houcai, 2015. "Optimal inventory and hedging decisions with CVaR consideration," International Journal of Production Economics, Elsevier, vol. 162(C), pages 70-82.
    2. Xue, Weili & Caliskan Demirag, Ozgun & Niu, Baozhuang, 2014. "Supply chain performance and consumer surplus under alternative structures of channel dominance," European Journal of Operational Research, Elsevier, vol. 239(1), pages 130-145.
    3. Jin, Yi & Zeng, Zhixiong, 2016. "Risk, risk aversion, and a finance-augmented neoclassical economic model of production," International Journal of Production Economics, Elsevier, vol. 176(C), pages 82-91.
    4. Caliskan Demirag, Ozgun, 2013. "Performance of weather-conditional rebates under different risk preferences," Omega, Elsevier, vol. 41(6), pages 1053-1067.
    5. Guo, Peijun & Ma, Xiuyan, 2014. "Newsvendor models for innovative products with one-shot decision theory," European Journal of Operational Research, Elsevier, vol. 239(2), pages 523-536.
    6. Dai, Jiansheng & Meng, Weidong, 2015. "A risk-averse newsvendor model under marketing-dependency and price-dependency," International Journal of Production Economics, Elsevier, vol. 160(C), pages 220-229.
    7. Ali, Mohammad M. & Babai, Mohamed Zied & Boylan, John E. & Syntetos, A.A., 2017. "Supply chain forecasting when information is not shared," European Journal of Operational Research, Elsevier, vol. 260(3), pages 984-994.
    8. repec:spr:annopr:v:237:y:2016:i:1:d:10.1007_s10479-013-1453-x is not listed on IDEAS
    9. Lin, Zhibing, 2016. "Price promotion with reference price effects in supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 85(C), pages 52-68.
    10. repec:gam:jsusta:v:9:y:2017:i:11:p:2148-:d:119991 is not listed on IDEAS
    11. Hu, Benyong & Meng, Chao & Xu, Dong & Son, Young-Jun, 2016. "Three-echelon supply chain coordination with a loss-averse retailer and revenue sharing contracts," International Journal of Production Economics, Elsevier, vol. 179(C), pages 192-202.
    12. Xinsheng, Xu & Zhiqing, Meng & Rui, Shen & Min, Jiang & Ping, Ji, 2015. "Optimal decisions for the loss-averse newsvendor problem under CVaR," International Journal of Production Economics, Elsevier, vol. 164(C), pages 146-159.
    13. Liang, Donghan & Li, Gang & Sun, Linyan & Chen, Yubao, 2013. "The role of rebates in the hybrid competition between a national brand and a private label with present-biased consumers," International Journal of Production Economics, Elsevier, vol. 145(1), pages 208-219.
    14. Huynh, Candice H. & Pan, Wenting, 2015. "Operational strategies for supplier and retailer with risk preference under VMI contract," International Journal of Production Economics, Elsevier, vol. 169(C), pages 413-421.
    15. repec:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-013-1386-4 is not listed on IDEAS
    16. repec:eee:jomega:v:75:y:2018:i:c:p:97-117 is not listed on IDEAS

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