Strategy Analysis for Retailer-Leading Supply Chain under Buyback Contract with Focus Theory of Choice

Abstract

This paper investigates a retailer-leading two-tier supply chain with a buyback contract under market demand uncertainty, where the retailer first announces a potential maximal order quantity and the supplier then provides a unit wholesale price to influence the retailer’s order quantity. In recent years, an increasing number of experimental studies have reported that even in repeated multi-turn games, the decisions of suppliers viewed as newsvendors deviate significantly from the expectation-maximizing options. In light of this observation, we employ the focus theory of choice to characterize suppliers’ behavioral tendencies and theoretically derive optimal unit wholesale prices based on suppliers’ focus preferences. With these results, we further explore how suppliers’ foci may influence the interactions between the retailer and the supplier. We find that when the supplier takes the positive evaluation system as the decision criterion, optimism degree and confidence level have a negative effect on the wholesale price and a positive effect on the final order quantity, and the final order quantity must be located between the most possible market demand and the upper limit of the market demand. This paper provides a behavioral perspective to analyze suppliers’ optimal responses and their influences on retailers’ decision-making. Theoretical and numerical analyses gain managerial insights for retailers to make decisions when faced with suppliers with different focus preferences.