Agency contracts with incentive mechanisms considering supplier risk aversion in a dynamic platform supply chain

One of the most common contracts used in platform supply chains is the agency contract in which online platforms as intermediaries and leaders allow suppliers direct access to their customers while charging a commission fee for providing this access. In this paper, we investigate whether the platform supply chain can achieve coordination by implementing an incentive subsidy under agency contracts when the supplier is risk-averse. Specifically, using standard Brownian motion to capture the market uncertainties and considering the dynamic impact of suppliers’ product price and quality as well as the platform’s services on the platform goodwill, we construct four dynamic game models. We then apply stochastic optimal control theory to solve models to obtain Stackelberg feedback equilibrium solutions. We find that agency contracts with incentive mechanism can improve the overall performance of platform supply chain systems and have a more significant impact on risk-averse suppliers. The platform provides certain incentive subsidy to suppliers, thus sharing the risk costs with them, which motivates suppliers to enhance product quality. Furthermore, the impact of platform goodwill on demand depends on the extent to which consumers value platform goodwill. Therefore, the incentive degree provided by the platform to suppliers has an optimization range, as excessive incentives may not be optimal.