Multidimensional Bargaining and Inventory Risk in Supply Chains: An Experimental Study

Abstract

We study the impact of multidimensional bargaining and the location of inventory risk on the performance of a two-stage supply chain. We conduct a controlled human subjects experiment where a retailer and supplier either interact through ultimatum offers or dynamically bargain over contract terms, including a wholesale price and, potentially, an order quantity. We also manipulate whether the risk associated with unsold inventory lies with the retailer or the supplier or is endogenously determined in the bargaining process. One key insight is that supply chain efficiency is significantly higher when the order quantity is included in the negotiation and that, contrary to the normative theory, this leads to a Pareto improvement whereby both the supplier and retailer earn higher profits. A second important result, also counter to the normative theory, is that the party incurring the cost of unsold inventory always earns a lower profit than its counterpart, regardless of the bargaining environment or inventory risk location. To explain these data, we posit that retailers and suppliers are affected by an anchoring bias and demonstrate that it can explain many of our results.

Overconfident Distribution Channels

“…(), Becker‐Peth et al. (), and Davis and Hyndman (). We extend this literature by incorporating the prevalent notion of overconfidence as a cognitive bias into a channel model in order to investigate its theoretical impacts and implications.…”

Inventory and ordering decisions: a systematic review on research driven through behavioral experiments

“…However, scaled-down versions using only three echelons (Steckel et al , 2004) or two echelons (Cantor and Katok, 2012; Özer et al , 2014; Wang and Wang, 2010; Wu, 2013) have also been used. We also observe literature on supply chain contracting that sometimes use a two-echelon lab experiment (Davis et al , 2014; Davis and Hyndman, 2019). The number of echelons can be easily altered to suffice the research questions.…”

Behavioral Operations: Past, Present, and Future

“…This stream of research is evolving from descriptive to being more prescriptive to inform how contract design in practice should take into account relevant human behavioral factors. More recently, a few studies further extend this research to examine human behavior in the bargaining process and how it affects the ultimate channel outcomes (Leider and Lovejoy 2016, Davis and Hyndman 2019, Haruvy et al 2019. These studies signify the trend of behavioral research helping to close the gap between theory and practice by examining richer decision-making processes.…”