Stable and Coordinating Contracts for a Supply Chain with Multiple Risk‐Averse Suppliers

We analyze a decentralized supply chain with a single risk‐averse retailer and multiple risk‐averse suppliers under a Conditional Value at Risk objective. We define coordinating contracts and show that the supply chain is coordinated only when the least risk‐averse agent bears the entire risk and the lowest‐cost supplier handles all production. However, due to competition, not all coordinating contracts are stable. Thus, we introduce the notion of contract core, which reflects the agents' “bargaining power” and restricts the set of coordinating contracts to a subset which is “credible.” We also study the concept of contract equilibrium, which helps to characterize contracts that are immune to opportunistic renegotiation. We show that, the concept of contract core imposes conditions on the share of profit among different agents, while the concept of contract equilibrium provide conditions on how the payment changes with the order quantity.