Contracting in supply chains: A laboratory investigation

Contracting in supply chains: A laboratory investigation

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Article ID: iaor200973221
Volume: 55
Issue: 12
Start Page Number: 1953
End Page Number: 1968
Publication Date: Dec 2009
Journal: Management Science
Authors: ,
Keywords: contracting
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.

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