Effective and necessary: Individual supplier behavior in revenue sharing and wholesale contracts

Julie Niederhoff, Panos Kouvelis

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

We consider under what conditions a revenue sharing contract is most effective at improving system efficiency relative to a simple wholesale price contract. We find that a complex coordinating contract is not always necessary because the wholesale price contract may perform sufficiently well; and coordinating contracts are not always effective if decision makers are strongly risk averse. Using a behavioral laboratory approach, we investigate how a supplier's 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-seeking 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.

Original languageEnglish (US)
JournalEuropean Journal of Operational Research
DOIs
StatePublished - Jan 1 2019

Keywords

  • Behavioral OR
  • Supply chain management

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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