The Commitment Conundrum of Inventory Sharing

Production and Operations Management (Forthcoming)

Baruch College Zicklin School of Business Research Paper No. 2018-05-04

53 Pages Posted: 7 Mar 2018 Last revised: 21 Nov 2019

See all articles by Shan Li

Shan Li

City University of New York - Narendra Paul Loomba Department of Management

Kay-Yut Chen

University of Texas at Arlington

Date Written: April 15, 2019

Abstract

In recent years, inventory sharing, in addition to the traditional within-firm model, also appears in the sharing-economy model where different firms can share their inventory via an internet platform. Two prominent issues, shaping the behaviors of inventory sharing systems, are the commitment of the transfer price and the commitment to share. In this paper we investigate, through a behavioral lens, the decisions of transfer price, order quantity and the resulting supply chain efficiency in different transshipment commitment scenarios. In particular, we consider two transfer price commitment settings (ex-ante or ex-post, depending on whether or not the inventory transfer price is committed before demand realization) and two sharing commitment rules (automatic or voluntary, depending on whether or not inventory sharing are pre-committed).

Our experimental results suggest that individuals set transfer prices much lower, and order much less, than what Nash equilibrium predicts. We also find substantial treatment effects where rational model can not explain. The magnitude of disparities relative to the Nash equilibrium prediction appears to be most substantial in the situation where transfer price is set ex ante and inventory sharing is voluntary. Motivated by these observations, we develop a behavioral model that incorporates quantal response equilibrium and fairness concerns. Empirical analysis indicates that our model provides a compelling explanation of the behavior observed in the data. This study provides implication on the design of the commitment rules in decentralized inventory sharing platforms.

Keywords: inventory sharing, supply chain, quantal response equilibrium, behavioral operations, experiments

Suggested Citation

Li, Shan and Chen, Kay-Yut, The Commitment Conundrum of Inventory Sharing (April 15, 2019). Production and Operations Management (Forthcoming), Baruch College Zicklin School of Business Research Paper No. 2018-05-04, Available at SSRN: https://ssrn.com/abstract=3131771 or http://dx.doi.org/10.2139/ssrn.3131771

Shan Li (Contact Author)

City University of New York - Narendra Paul Loomba Department of Management ( email )

55 Lexington Avenue
New York, NY 10010
United States

Kay-Yut Chen

University of Texas at Arlington ( email )

Arlington, TX
United States

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