Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter?

Ho, Teck H.; Zhang, Juanjuan

doi:10.1287/mnsc.1070.0788

Cited by 313 publications

(190 citation statements)

References 20 publications

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“…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).…”

Section: Literature Reviewmentioning

confidence: 99%

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

2014

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Whether and how trust and trustworthiness differ between a collectivist society, e.g., China, and an individualistic one, e.g., the U.S., generate much ongoing scientific debate and bear significant practical values for managing cross-country transactions. We experimentally investigate how supply chain members' countries of origin -China versus the U.S. -affect trust, trustworthiness, and strategic information sharing behavior in a cross-country supply chain. We consider a two-tier supply chain in which the upstream supplier solicits demand forecast information from the retailer to plan production; but the retailer has an incentive to manipulate her forecast to ensure abundant supply. The levels of trust and trustworthiness in the supply chain and supplier's capability to determine the optimal production quantity affect the efficacy of forecast sharing and the resulting profits. We develop an experimental design to disentangle these three aspects and to allow for real-time interactions between geographically distant and culturally heterogeneous participants. We observe that, when there is no prospect for long-term interactions, our Chinese participants consistently exhibit lower spontaneous trust and trustworthiness than their U.S. counterparts do. We quantify the differences in trust and trustworthiness between the two countries, and the resulting impact on supply chain efficiency. We also show that Chinese individuals exhibit higher spontaneous trust towards U.S. partners than Chinese ones, primarily because they perceive that individuals from the U.S. are more trusting and trustworthy in general.This positive perception towards U.S. people is indeed consistent with the U.S. participants' behavior in forecast sharing. In addition, we quantify that a Chinese supply chain enjoys a larger efficiency gain from repeated interactions than a U.S. one does, as the prospect of building a long-term relationship successfully sustains trust and trustworthiness by Chinese partners. We advocate that companies can reinforce the positive perception of Westerners held by the Chinese population and commit to long-term relationships to encourage trust by Chinese partners. Finally, we also demonstrate that both populations exhibit similar pull-to-center bias when solving a decision problem under uncertainty (i.e., the newsvendor problem).*

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Section: Literature Reviewmentioning

confidence: 99%

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

2014

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“…Specifically, we are interested in understanding how the type of an alliance and the number of partnering firms influence the investment decisions of financially motivated agents. In the tradition of experimental economics literature, we allow individual participants to represent a firm (see Smith 1989, Holt 1995, Amaldoss et al 2000, Weber and Camerer 2003, Amaldoss and Rapoport 2005, Ho and Zhang 2008.…”

Section: Empirical Investigationmentioning

confidence: 99%

Cross-Function and Same-Function Alliances: How Does Alliance Structure Affect the Behavior of Partnering Firms?

Amaldoss

Staelin

2010

Management Science

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F irms collaborate to develop and deliver new products. These collaborations vary in terms of the similarity of the competencies that partnering firms bring to the alliance. In same-function alliances, partnering firms have similar competencies, whereas in cross-function alliances, partners have very different competencies. On examining managers' view of these alliances, we find that, on average, same-function alliances are expected to perform better than cross-function alliances, holding fixed the level of inputs. A game-theoretic analysis shows that this apprehension about cross-function alliances is consistent with a Pareto-inferior equilibrium. A Pareto-superior equilibrium, however, suggests that partners in cross-function alliances may invest more in their alliances than those in same-function alliances. It is also often believed that increasing the number of partnering firms is not conducive for collaborative effort. Our analysis shows that this belief is correct for same-function alliances, but not for cross-function alliances. We test these equilibrium predictions in an experiment where we exogenously vary the type of alliance and the number of partnering firms. The experimental results lend support for the Pareto-superior equilibrium. Partners in cross-function alliances invested more than their counterparts in same-function alliances, and this difference in investment levels increased with the number of partnering firms. We extend our model to consider alliances where firms have an opportunity to learn from their partners and later leverage this knowledge outside the scope of their alliance. Though such learning increases the resources committed by alliance partners in the learning phase, it decreases investment in the subsequent competition and also dampens the overall investment across the two stages. In addition, an increase in interalliance competition decreases investments in the focal alliance but increases investment in the competition outside the scope of the alliance.

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“…The total market size is known and fixed at N . Hence, consumers' uniformly distributed reservation prices result in a linear inverse demand curve, which is a well-accepted demand model in the literature (e.g., Phillips 2005, Cui et al 2007, Ho and Zhang 2008.…”

Section: The Consumer's Purchase Decisionmentioning

confidence: 99%

Markdown or Everyday Low Price? The Role of Behavioral Motives

2016

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We study a seller's optimal pricing and inventory strategies when behavioral (non-pecuniary) motives affect consumers' purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everydaylow-price, and determines the optimal prices and inventory level at the beginning of a two-period selling season. Two salient behavioral motives that impact consumers' purchase decisions and the seller's optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product's future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit losses. We contrast the roles of consumers' strategic (pecuniary) motives with their behavioral (non-pecuniary) motives in affecting purchase, pricing, and inventory decisions. The presence of the behavioral motives reinstates the profitability of markdown over everyday-low-price, in sharp contrast to prior studies of only strategic motives which suggest the contrary. We characterize how and why strategic versus behavioral motives affect decisions in distinctive manners. In doing so, this paper also introduces and determines the behavioral benefits of pricing in leveraging consumers' behavioral regularities. We advocate that tactics which may intensify consumers' misperception of availability, such as intentionally disclosing low inventory levels, can have a far-reaching impact on improving the seller's profit.*

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Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter?

Cited by 313 publications

References 20 publications

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

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

Cross-Function and Same-Function Alliances: How Does Alliance Structure Affect the Behavior of Partnering Firms?

Markdown or Everyday Low Price? The Role of Behavioral Motives

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