The Behavioral Effects of Competition Intensity and Cost Structure on Competing Suppliers: An Experimental Study in the Context of the USA

Abstract

This research investigates how competition intensity and differences in cost structures affect decisions made by competing suppliers and the role that behavioral factors play as influences. We use controlled laboratory experiments to study the scenario of suppliers competing for a share of demand being outsourced by a single buyer. The buyer seeks to maximize the service level provided by suppliers by allocating based on different performance measures which create varying levels of competition intensity. The experimental treatments include those performance measures as well as differences in supplier cost structures. Our experimental results show that in the majority of cases suppliers' decisions do not confirm theoretical predictions from the Nash equilibrium, and we find patterns in those deviations. To explain them, we first evaluate behavioral factors found in the literature including bounded rationality, learning, and other-regarding behavior. We then introduce a new behavioral factor, rival-chasing. Rival-chasing builds on other-regarding behavior by considering competitors' actions in addition to their outcomes. We find that rival-chasing can explain patterns in suppliers' behavior that cannot be explained by other behavioral factors.