Game theoretic analysis of a multi-period fashion supply chain with a risk averse retailer

Abstract

This paper studies a single-manufacturer single-retailer multi-period fashion supply chain which sells a category of short-life highly fashionable products. The retailer is risk averse and the supply chain is led by the upstream manufacturer. This paper studies two commonly seen contracts in the fashion industry, namely the pure wholesale pricing contract (PWPC) and the markdown money contract (MDMC). The efficient region for the risk averse retailer’s optimal ordering quantity for each contract is found and this region will: 1) become smaller if the wholesale price increases (under both PWPC and MDMC); 2) get larger when the markdown money increases (under MDMC). We introduce the concept of ‘risk averse quantity reduction level’ (RAQRL). Our analytical findings further indicate that: 1) under scenario one in which the manufacturer’s goal is to maximise the supply chain’s expected profit, the appropriately set MDMC can coordinate the supply chain whereas PWPC cannot; 2) under scenario two in which the manufacturer’s goal is to maximise the supply chain’s expected profit while ensuring the variance of profit is within a limit, both PWPC and MDMC can coordinate the supply chain.