Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation

Abstract

Negotiations between buyers and sellers (or suppliers) of goods and services have become increasingly important due to the growing trend towards international purchasing, outsourcing and global supply networks together with the high uncertainty associated with them. This paper examines the effect of ambiguity aversion on price negotiations using multiple-priors-based real options with non-extreme outcomes. We study price negotiation between a buyer and seller in a dual contingentclaims setting (call option holding buyer vs. put option holding seller) to derive optimal agreement conditions under ambiguity with and without social network effects. We find that while higher ambiguity aversion raises the threshold for commitment for the seller, it has equivocal effects on the buyer's negotiation prospects in the absence of network control. Conversely when network position and relative bargaining power are accounted for, we find the buyer's implicit price (or negotiation threshold) decreases (or increases) unequivocally with increasing aversion to ambiguity. Extending extant real options research on price negotiation to the case of ambiguity, this set of results provides new insights into the role of ambiguity aversion and network structures in buyer-seller relationships, including how they influence the range of negotiation agreement between buyers and sellers. The results also help assist managers in formulating robust buying/selling strategies for bargaining under uncertainty. By knowing their network positions and gathering background information or inferring the other party's ambiguity tolerance beforehand, buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities.

Ambiguity and its coping mechanisms in supply chains lessons from the Covid-19 pandemic and natural disasters

“…Ellsberg (1961) suggests that ambiguity could lie between risk and complete ignorance.Ambiguity is quite diversely covered, specific to a context and lacking in coherence. Still taken together this showcases a “multifaceted” construct.The “modelling” pieces are predominantly normative (rational choice) in approach with few studies adopting an explicit behavioural lens (Gao et al , 2018). In fact, not much is reported on the “sources” of ambiguity, with studies mostly attentive to the non-behavioural sources such as sub-national institutional distance (Dong et al , 2016), supplier protectiveness (Lawson and Potter, 2012) or pre-contractual conditions (Wacker et al , 2016).…”

“…There are also studies which adhere more closely to the 'uncertainty about probability' definition of ambiguity (Gao et al, 2018;Mak et al, 2014;Natarajan et al, 2012;Wu et al 2008;Zhang et al, 2016).…”

“…4) The 'modelling' pieces are predominantly normative (rational choice) in approach with few studies adopting an explicit behavioural lens (Gao et al, 2018).…”

“…The OM literature has treated ambiguity as performance ambiguity (Boloori et al , 2020; Cachon and Lariveiere, 2016; Gray and Handley, 2015; Wacker et al , 2016), information ambiguity (Peng et al , 2008), causal ambiguity (Hunt and Davis, 2008; Lawson and Potter, 2012), extreme ambiguity (Silvestre et al , 2015), role ambiguity (Dong et al , 2016), relational/contractual ambiguity (Jia et al , 2016; Kim and Choi, 2015; Steinbach et al , 2018), and processing time ambiguity (Cheon et al , 2017). There are also studies which adhere more closely to the “uncertainty about probability” definition of ambiguity (Gao et al , 2018; Mak and Shen, 2014; Natarajan et al , 2012; Wu et al , 2008; Zhang et al , 2016).…”

Accounting for ambiguity and trust in partial outsourcing: A behavioral real options perspective

“…Compared with multiple-priors ambiguity (e.g., Chen and Epstein, 2002;Nishimura and Ozaki, 2007), Choquet utility allows for different attitudes towards ambiguity, probability weighting and meets the dynamic consistency requirement of real options analysis. Besides the significance of ambiguity in buyer-seller relationships (see e.g., Hazen et al, 2011;Gao et al, 2018), trust is also considered a key factor in outsourcing but it is rarely studied in extant real options research.…”