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Abstract Using a concave utility function to depict retailer’s risk aversion in a supply chain which is comprised of a riskaverse retailer and a riskneutral manufacturer, this paper discusses the cause why the retailer reduces the order quantity under risk aversion based on Newsboy model. And a real option contract is designed to coordinate the supply chain. The results show that the reason is the retailer’s increased effective overage cost caused by risk aversion. The results also show that through a real option contract, the manufacturer can maximize the supply chain’s profit by properly designing the contract parameters, which is in contrast to the result of existing research. The third result show that the coordinated real option contract is of good flexibility, i.e., the more riskaverse retailer, the greater share of his profit and the lower option price the manufacturer provides, the higher exercise price.
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Received: 06 July 2012
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2013, Vol. 10 
