19 Pages Posted: 10 Oct 2012 Last revised: 12 Feb 2016
Date Written: Feburary 10, 2016
We consider under what conditions a revenue sharing contract is most effective at improving system efficiency relative to a simple wholesale price contract. Using a behavioral laboratory approach, we investigate how a supplier's individual differences in risk aversion and fairness concerns influence how they set the pricing parameter(s) of a contract. We find that risk-neutral self-interested suppliers were able to improve the system and their own profits significantly under revenue sharing compared to wholesale pricing. However, individual behavioral factors of risk aversion or fairness preferences often made the more complicated revenue sharing contract either ineffective or unnecessary. Specifically, given a fairness-minded supplier, the simple wholesale price contract is comparably efficient to the revenue sharing contract set by a risk-neutral supplier and we find the coordinating contract is unnecessary. Conversely, given a strongly risk-averse supplier with no concerns for fairness a revenue sharing contract is ineffective in overcoming double marginalization.
Keywords: supply chain coordination, behavioral operations, behavior, wholesale, revenue sharing, experimental
Suggested Citation: Suggested Citation
Niederhoff, Julie and Kouvelis, Panos, Effective and Necessary: Individual Supplier Behavior in Revenue Sharing and Wholesale Contracts (Feburary 10, 2016). Available at SSRN: https://ssrn.com/abstract=2159893 or http://dx.doi.org/10.2139/ssrn.2159893