R K Amit

Risk neutral assumption in the newsvendor problem under recourse option predicts the order quantity insensitive to the selling price; and, risk aversion modeled through common utility functions gives decreasing order quantity with increasing selling price. In this paper, we consider loss aversion to model the choice preference of the decision maker in the newsvendor problem under recourse option, and prove that loss aversion predicts the rational ordering behavior of the newsvendor with respect to the changes in price and cost parameters. Further, we find that loss aversion can significantly improve the performance of utility function based models in predicting the rational behavior. We extend the analysis to a supply chain setting and establish coordinating contract between a loss averse retailer facing a newsvendor problem and a risk neutral supplier under recourse option. We find that the contract parameter does not depend on the loss aversion; hence, the same contract can be implemented with retailers with different levels of loss aversion.

In the newsvendor setting, we consider a prospect theory model with a stochastic-subjective reference point. The reference point is based on the pay-offs corresponding to the extreme values of demand; and, is influenced by the perception of costs associated with understocking and overstocking, and the pessimism level of the decision maker. Our prospect theory model describes the recent observations in the newsvendor experiments—the non-linear ordering behavior with respect to the profit margin and behavior at the extreme profit margins, in addition to the pull-to-center effect and asymmetry in ordering.

Traditional modeling in supply chain contract analysis shows that a wholesale price contract cannot coordinate a supply chain, whereas a buyback contract can coordinate. In this study, we consider a supply chain involving a risk-neutral supplier and a behavioral retailer under wholesale price and buyback contracts. We characterize the structural properties of the wholesale price contract in a supply chain with a behavioral retailer. Our study reveals that a wholesale price contract can coordinate a supply chain with a behavioral retailer under certain conditions. Under the same conditions, our analysis shows that a buyback contract coordinates the supply chain. Furthermore, we derive the conditions under which a buyback contract will not coordinate a supply chain involving a behavioral retailer. We validate our model with the existing experimental results on supply chain contracts. Finally, we show that a wholesale price contract can outperform a buyback contract in a supply chain having a behavioral retailer.

The insufficiency of primary lead sources to satisfy the demand makes the recycling of used batteries necessary. This study quantitatively assesses the impact of different policy instruments on reducing lead pollution from lead-acid battery (LAB) recycling. We develop a system dynamics model to analyze the dynamics of LAB recycling considering remanufactures and recyclers spanning formal and informal sectors in the Indian context. We model the competition between the formal and informal sectors in both recycling and remanufacturing settings in the lead recovery process. We test our model with the data from the Indian automobile LAB recycling and investigate the impact of policy decisions on the performance of the automobile LAB recycling. This study explores three policies in anticipation of improving the efficiency of the recycling process—(i) reduce tax on regulated recyclers, (ii) offer subsidy to regulated recyclers, and (iii) offer subsidy to formal battery remanufactures. Our results show that the first two policies help the business shift from informal to formal sector which results in lowering the lead pollution. We observe that providing subsidy on formal battery can reduce the amount of lead excretion; however, a very high subsidy can lead to the shutting down of both regulated and unregulated recycling sectors.