Incentives to Enhance Production Reliability against Disruption: Cost-Sharing vs. Penalty

Two kinds of incentive strategies, cost-sharing and penalty, are examined in dealing with production disruption, consideration process reliability as an endogenous factor for a two-echelon supply chain. Based on the Stackelberg game framework, we derive optimal decisions chain partners compare their expected profits different strategies. Considering uncertain demand retailer’s preference against risk, further analyze how partners’ profit influenced by feature loss aversion. From theoretical analysis numerical experiments, find that: (1) overall, penalty strategy dominates that retailer, whereas reverse applies respect to manufacturer; (2) may outperform whole chain, depending demand; (3) reasonable aversion risk can help retailer achieve more robust result when is adopted under volatile unpredictable demand.