Why are Minimum Order Quantity Contracts Popular in Practice? A Behavioral Investigation

32 Pages Posted: 26 Apr 2018 Last revised: 11 May 2021

See all articles by Ozge Tuncel

Ozge Tuncel

Eindhoven University of Technology

Niyazi Taneri

University of Cambridge - Cambridge Judge Business School

Sameer Hasija

INSEAD - Technology and Operations Management

Date Written: May 11, 2021

Abstract

Problem Definition: In theory, all coordinating contracts are equivalent, however, the minimum order quantity (MOQ) contract is observed to be more popular in practice. We seek to understand whether decision makers as suppliers can perform better with the MOQ contract and, if so, why? We also study whether MOQ is indeed the preferred contract when subjects are allowed to choose among coordinating contracts.
Academic/Practical Relevance: The behavioral operations management literature has established a tradeoff between complex coordinating and simple non-coordinating contracts. This paper fills a gap in the literature by studying whether and how the coordinating MOQ contract attenuates this tradeoff.
Methodology: First, we test whether subjects in the role of suppliers given only a single contract type
can optimize its parameters. Second, we introduce treatments where the coordinating contracts subject to demand risk are hedged such that risk is eliminated. Third, we repeat two of the initial set of treatments
with a cognitive load survey and introduce single-variable versions of those treatments to reduce cognitive burden. Fourth, we introduce a novel experimental design where, in each period, subjects choose both the type of contract to offer and the parameters of that contract.
Results: We find that (i) subjects perform significantly better with the MOQ contract compared to other
coordinating contracts; (ii) this can be attributed to the risk inherent in and cognitive burden induced by
those contracts; and, (iii) subjects choose the MOQ contract more frequently over theoretically equivalent coordinating contracts.
Managerial Implications: We show that the tradeoff between efficiency and complexity can be mitigated by simpler yet efficient contracts. Hence, there is considerable benefit to identifying contractual mechanisms that ameliorate the adverse effects of complexity. This explains the prevalence of MOQ terms in supply contracts.

Keywords: Behavioral Operations, Contracts: Minimum Order Quantity, Buyback, Revenue-sharing

Suggested Citation

Tuncel, Ozge and Taneri, Niyazi and Hasija, Sameer, Why are Minimum Order Quantity Contracts Popular in Practice? A Behavioral Investigation (May 11, 2021). INSEAD Working Paper No. 2021/22/TOM, Available at SSRN: https://ssrn.com/abstract=3169112 or http://dx.doi.org/10.2139/ssrn.3169112

Ozge Tuncel

Eindhoven University of Technology ( email )

Niyazi Taneri (Contact Author)

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington St.
Cambridge, CB21AG
United Kingdom

Sameer Hasija

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
201
Abstract Views
1,188
rank
210,726
PlumX Metrics