Designing Buyback Contracts for Irrational but Predictable Newsvendors

32 Pages Posted: 10 Mar 2010 Last revised: 4 Sep 2012

See all articles by Michael Becker-Peth

Michael Becker-Peth

University of Cologne - Department of Supply Chain Management and Management Science

Elena Katok

University of Texas at Dallas

Ulrich W. Thonemann

University of Cologne - Faculty of Management, Economics and Social Sciences

Date Written: April 12, 2011

Abstract

One of the main assumptions in research on designing supply contracts is that decision makers act in a way that maximizes their expected profit. A number of laboratory experiments demonstrated that this assumption does not hold – specifically, faced with uncertain demand, decision-makers place orders that systematically deviate from the expected-profit maximizing levels. We add to this body of knowledge by demonstrating that ordering decisions also systematically depend on individual contract parameters, and developing a behavioral model that captures this systematic behavior. We proceed to test our behavioral model with two different experiments, and use the data to derive empirical model parameters for individual subjects. We then test our approach in an additional out-of-sample experiment that confirms that indeed, contracts designed using the behavioral model perform much better than contracts designed using the standard model.

Keywords: Newsvendor, Behavioral Operations, Experimental, Order Behavior, Contract Optimization

Suggested Citation

Becker-Peth, Michael and Katok, Elena and Thonemann, Ulrich W., Designing Buyback Contracts for Irrational but Predictable Newsvendors (April 12, 2011). Available at SSRN: https://ssrn.com/abstract=1567614 or http://dx.doi.org/10.2139/ssrn.1567614

Michael Becker-Peth (Contact Author)

University of Cologne - Department of Supply Chain Management and Management Science ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Elena Katok

University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Dr.
Richardson, TX 75080
United States

HOME PAGE: http://www.utdallas.edu/~ekatok/

Ulrich W. Thonemann

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Richard-Strauss-Str. 2
Cologne, D-50923
Germany

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