Bargaining in Supply Chains (Long Version)

58 Pages Posted: 16 Dec 2014 Last revised: 21 Mar 2015

See all articles by Stephen Leider

Stephen Leider

University of Michigan, Stephen M. Ross School of Business

William S. Lovejoy

University of Michigan, Stephen M. Ross School of Business

Date Written: March 2015

Abstract

We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost differences between firms in tiers 1 and 2. We measure how these underlying costs influence the efficiency, negotiated prices and profit distribution across the supply chain, and the consistency of these outcomes with existing theory. We find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes, with profits in a tier generally increasing with decreased competition in the tier and increasing with decreased competition in alternate tiers. The Balanced Principal model of supply chain bargaining does a good job explaining our data, and outperforms the common assumption of leader-follower negotiations. We find a significant anchoring effect from a firm's first bid but no effect of the sequence of those bids, no evidence of failure to close via escalation of commitment, and mixed results for a deadline effect. We also find an interesting asymmetry between the buy and sells sides in employed bidding strategy. The buy side makes predominantly concessionary offers after the initial anchor, but a significant number of sell side firms engage in aggressive anti-concessionary bidding, a strategy that is effective in that it increases prices while not compromising closure rates.

Keywords: Bargaining, Supply chains, Experiments

JEL Classification: C78, M11, C92

Suggested Citation

Leider, Stephen and Lovejoy, William S., Bargaining in Supply Chains (Long Version) (March 2015). Ross School of Business Paper No. 1259. Available at SSRN: https://ssrn.com/abstract=2538547 or http://dx.doi.org/10.2139/ssrn.2538547

Stephen Leider (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

HOME PAGE: http://www-personal.umich.edu/~leider/

William S. Lovejoy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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