Abstract:The decision of a two-tier supply chain consisting of a risk-neutral supplier and a loss aversion retailer who considers the reference profit is studied under stochastic demand. The Stackelberg model, in which the supplier is the leader who decides the wholesale price and the retailer is the follower who decides the ordering quantity, is developed under buyback policy. Through the reference dependence model, the optimal ordering quantity and wholesale price are derived for both the centralized and the decentralized supply chain system respectively, and the relationships between the optimal decision and the loss aversion, reference profit intensity, as well as the retailer's optimism level are analyzed. Furthermore, the buyback contract that can perfectly coordinate the supply chain is presented. Results show that, for both the centralized and decentralized supply chain, the ordering quantity decreases with the loss aversion degree and optimism level. However, the ordering quantity increases with the reference profit intensity when the retailer is less loss aversion, and vice versa. For the wholesale price decision, it increases with the loss aversion degree, optimism level and reference profit intensity when exceeding a threshold, and vice versa.