Contracting in Supply Chains: A Laboratory Investigation

Abstract

The coordination of supply chains by means of contracting mechanisms has been extensively explored theoretically but not tested empirically. We investigate the performance of three commonly studied supply chain contracting mechanisms: the wholesale price contract, the buyback contract, and the revenue-sharing contract. The simplified setting we consider utilizes a two-echelon supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and delivery occurs instantaneously. We compare the three mechanisms in a laboratory setting using a novel design that fully controls for strategic interactions between the retailer and the supplier. Results indicate that although the buyback and revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and revenue-sharing contracts are mathematically equivalent, they do not generally result in equivalent supply chain performance.supply chain contracts, experimental economics

Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States

“…Since Sterman (1989), researchers have studied behavioral issues in various operations contexts, ranging from the bullwhip effect (Steckel et al 2004, Croson and, newsvendor decisions (Schweitzer and Cachon 2000, Bolton and Katok 2008, Su 2008, procurement auctions (Cason et al 2011), supply chain contracting (Cui et al 2007, Lim and Ho 2007, Chen et al 2008, Ho and Zhang 2008, Katok and Wu 2009, Kalkanci et al 2011, to information sharing in a supply chain (Özer et al 2011).…”

Guiding the next generation of doctoral students in operations management

“…Croson and Donohue (2006), Croson et al (2007), and Katok and Wu (2006) conduct different behavioral experiments to explore different OM issues ranging from information sharing, channel coordination, and supply contracts in the context of supply chain management. Loch and Wu (2007) present a set of methods and a structured area of study to analyze behavioral issues within the OM paradigm to guide OM researchers who wish to conduct behavioral experiments pertaining to OM issues.…”

Coordinating Contracts in SCM: A Review of Methods and Literature

“…In a laboratory study, Katok and Wu (2009) show that the effect of coordinating contracts on supply chain efficiency is smaller than what is predicted analytically. On the other hand, the small number of empirical research papers in this area is almost unanimously indicating that the actual decision making process in supply chains are hugely influenced by bounded rationality, anchoring, experience, and insufficiently adjusted heuristics (e.g.…”