Coordinating a Behavioral Supply Chain Under Revenue-Sharing Contract

The chapter introduces supply chain contracts involving nonlinear optimization in the stochastic demand setting. A literature review on prospect theory in supply chain context and theoretical results on the traditional supply chain are provided. This chapter analyzes the performance of a supply chain that includes a behavioral retailer in the context of a revenue-sharing contract using a decision-theoretic framework. We investigate the framework of prospect theory with a nonlinear stochastic reference point to model the retailer’s behavior. We derive the optimal behavioral retailer option under the revenue-sharing contract. The analysis demonstrates that the behavioral supply chain’s revenue-sharing contract can coordinate the supply chain. The chapter concludes with managerial implications and future research initiatives.