Private Information and Dynamic Bargaining in Supply Chains: An Experimental Study

2020 ◽  
Author(s):  
Andrew M. Davis ◽  
Kyle Hyndman
Keyword(s):  
Supply Chain ◽  
Private Information ◽  
Human Subjects ◽  
Problem Definition ◽  
Bargaining Solution ◽  
Additional Experiment ◽  
Cost Information ◽  
Private Cost ◽  
Managerial Implications ◽  
Verifiable Disclosure

Problem definition: We conduct a controlled human-subjects experiment in a two-tier supply chain where a supplier’s per-unit production cost may be private information while bargaining with a buyer. Academic/practical relevance: Academically, supply chain studies often assume full-information or highly structured bargaining. We consider private information with dynamic, unstructured bargaining. In practice, a buyer may not know its supplier’s cost exactly and interact with its supplier in a back-and-forth bargaining environment. Thus, understanding how a supplier’s private cost information affects both supply chain outcomes and bargaining is new to the literature and relevant to practice. Methodology: We employ insights from mechanism design to generate restrictions on the space of agreements and solve for a specific bargaining solution under private information to generate precise predictions. These predictions are then tested through a human-subjects experiment. Results: In our experiment, theory predicts that all supplier types should earn at least 50% of total profits when their cost information is private. However, we find that high-cost suppliers earn a disproportionately low share of total profits under private information, 20.16%. We show that this is because buyers, under private information, act as if they are bargaining with the lowest-cost supplier and suppliers do not appear to blame buyers for behaving this way. Based on these findings, we conduct an additional experiment where suppliers have the ability to communicate their private costs to buyers and observe that verifiable disclosure significantly increases profits for high-cost suppliers. Managerial implications: High-cost suppliers actually suffer from having their costs as private information, which runs counter to theory. However, if high-cost suppliers can credibly disclose their costs to buyers, they can significantly increase profits. Lastly, although private information does not lead to more disagreements, negotiations do take longer, which can be costly to firms.

Procurement for Assembly Under Asymmetric Information: Theory and Evidence

2021 ◽  
Author(s):  
Andrew M. Davis ◽  
Bin Hu ◽  
Kyle Hyndman ◽  
Anyan Qi
Keyword(s):  
Supply Chain ◽  
Mechanism Design ◽  
Operations Management ◽  
Bargaining Power ◽  
Human Subjects ◽  
Cost Information ◽  
Supply Chain Efficiency ◽  
Private Cost ◽  
Dynamic Bargaining ◽  
Sequential Contracting

We study an original equipment manufacturer (OEM) purchasing two inputs for assembly from two suppliers with private cost information. The OEM can contract with the two suppliers either simultaneously or sequentially. We consider both cases in which the OEM has relatively equal bargaining power (the dynamic bargaining institution) or substantial bargaining power (the mechanism design institution). For the dynamic bargaining institution, we show that in sequential bargaining, the supply chain profit is higher, the OEM earns a lower profit, the first supplier earns a higher profit, and the second supplier may earn a higher or lower profit, than compared with simultaneous bargaining. For the mechanism design institution, we show that all players’ profits are the same in simultaneous and sequential contracting. We also benchmark against a case where the OEM procures both inputs from a single integrated supplier (a dyadic supply chain). We then test these predictions in a human-subjects experiment, which supports many of the normative predictions qualitatively with some deviations: an OEM with relatively equal bargaining power weakly prefers to contract with suppliers simultaneously, whereas an OEM with substantial bargaining power prefers to contract with suppliers sequentially. In addition, the OEM’s profit and supply chain efficiency are higher in the dyadic supply chain than the assembly system. This paper was accepted by Charles Corbett, operations management.

Truthful Mechanisms for Medical Surplus Product Allocation

2020 ◽  
Vol 22 (4) ◽  
pp. 735-753 ◽  
Author(s):  
Can Zhang ◽  
Atalay Atasu ◽  
Turgay Ayer ◽  
L. Beril Toktay
Keyword(s):  
Private Information ◽  
Value Added ◽  
Information Provision ◽  
Problem Definition ◽  
Preference Ranking ◽  
Additional Increase ◽  
Healthcare Facilities ◽  
Selection Decisions ◽  
Managerial Implications ◽  
Recipient Selection

Problem definition: We analyze a resource allocation problem faced by medical surplus recovery organizations (MSROs) that recover medical surplus products to fulfill the needs of underserved healthcare facilities in developing countries. The objective of this study is to identify implementable strategies to support recipient selection decisions to improve MSROs’ value provision capability. Academic/practical relevance: MSRO supply chains face several challenges that differ from those in traditional for-profit settings, and there is a lack of both academic and practical understanding of how to better match supply with demand in this setting where recipient needs are typically private information. Methodology: We propose a mechanism design approach to determine which recipient to serve at each shipping opportunity based on recipients’ reported preference rankings of different products. Results: We find that when MSRO inventory information is shared with recipients, the only truthful mechanism is random selection among recipients, which defeats the purpose of eliciting information. Subsequently, we show that (1) eliminating inventory information provision enlarges the set of truthful mechanisms, thereby increasing the total value provision; and (2) further withholding information regarding other recipients leads to an additional increase in total value provision. Finally, we show that under a class of implementable mechanisms, eliciting recipient valuations has no value added beyond eliciting preference rankings. Managerial implications: (1) MSROs with large recipient bases and low inventory levels can significantly improve their value provision by appropriately determining the recipients to serve through a simple scoring mechanism; (2) to truthfully elicit recipient needs information to support the recipient selection decisions, MSROs should withhold inventory and recipient-base information; and (3) under a set of easy-to-implement scoring mechanisms, it is sufficient for MSROs to elicit recipients’ preference ranking information. Our findings have already led to a change in the practice of an award-winning MSRO.

Product Flexibility Strategy Under Supply and Demand Risk

2021 ◽  
Author(s):  
Yimin Wang ◽  
Scott Webster
Keyword(s):  
Supply Chain ◽  
Supply And Demand ◽  
Problem Definition ◽  
Base Case ◽  
Supply Network ◽  
Aggregation Effect ◽  
Risk Aggregation ◽  
Managerial Implications ◽  
Product Flexibility ◽  
Global Uncertainty

Problem definition: With heightened global uncertainty, supply chain managers are under increasing pressure to craft strategies that accommodate both supply and demand risks. Although product flexibility is a well-understood strategy to accommodate risk, there is no clear guidance on the optimal flexibility configuration of a supply network that comprises both unreliable primary suppliers and reliable backup suppliers. Academic/practical relevance: Existing literature examines the value of flexibility with primary and backup suppliers independently. For a risk-neutral firm, research shows that (a) incorporating flexibility in a primary supplier by replacing two dedicated ones (in absence of backup supply) is always beneficial and that (b) adding flexibility to a reliable backup supplier (in absence of product flexibility in primary suppliers) is always valuable. It is unclear, however, how flexibility should be incorporated into a supply network with both unreliable primary suppliers and reliable backup suppliers. This research studies whether flexibility should be incorporated in a primary supplier, a backup supplier, or both. Methodology: We develop a normative model to analyze when flexibility benefits and when it hurts. Results: Compared with a base case of no flexibility, we prove that incorporating flexibility in either primary or backup suppliers is always beneficial. However, incorporating flexibility in both primary and backup suppliers can be counterproductive because the supply chain performance can decline with saturated flexibility, even if flexibility is costless. A key reason is that the risk-aggregation effect of consolidating flexibility in an unreliable supplier becomes more salient when flexibility is already embedded in a backup supplier. Managerial implications: This research refines the existing understanding of flexibility by illustrating that flexibility is not always beneficial. When there is a choice, a firm should prioritize incorporating flexibility in a reliable backup supplier.

Strategic Inventories Under Supply Chain Competition

2021 ◽  
Author(s):  
Xi Li ◽  
Yanzhi Li ◽  
Ying-Ju Chen
Keyword(s):  
Supply Chain ◽  
Supply Chains ◽  
Distribution Channel ◽  
Problem Definition ◽  
Supply Chain Competition ◽  
Managerial Implications ◽  
Holding Cost ◽  
Inventory Holding ◽  
Period Model

Problem definition: We consider the effects of strategic inventory (SI) in the presence of chain-to-chain competition in a two-period model. Academic/practical relevance: Established findings suggest that SI may alleviate double marginalization and improve the efficiency of a decentralized distribution channel. However, no studies consider the role of SI under chain-to-chain competition. Methodology: We build a two-period model consisting of two competing supply chains, each with an upstream manufacturer and an exclusive retailer. The retailers compete on either price or quantity. We characterize the firms’ strategies under the concept of perfect Bayesian equilibrium. We consider cases where contracts are either observable or unobservable across supply chains. Results: (1) SI still exists under chain-to-chain competition. Retailers may carry more inventory when the competition becomes fiercer, which further intensifies the supply chain competition. (2) Different from the existing findings, SI may backfire and hurt all firms. Interestingly, firms may benefit from a higher inventory holding cost. (3) Under supply chain competition, the prisoner’s dilemma can arise if competition intensity is intermediate; in other words, manufacturers are better off without strategic inventory, and yet they cannot help allowing strategic inventory, which is the unique equilibrium. Managerial implications: Despite its appeal among firms of a single supply chain, the role of SI is altered or even reversed by chain-to-chain competition. Conventional wisdom on SI should be applied with caution.

scholarly journals Nonbinding Goals in Teams: A Real Effort Coordination Experiment

2020 ◽  
Vol 22 (5) ◽  
pp. 1026-1044
Author(s):  
James Fan ◽  
Joaquín Gómez-Miñambres
Keyword(s):  
Energy Use ◽  
Weak Link ◽  
Human Subjects ◽  
Individual Performance ◽  
Problem Definition ◽  
Reference Points ◽  
Team Production ◽  
Team Members ◽  
Managerial Implications ◽  
The Impact

Problem definition: We investigate the impact of nonbinding (wage-irrelevant) goals, set by a manager, on a team of workers with “weak-link” production technology. Can nonbinding goals improve team production when team members face production complementarity? Academic/practical relevance: Nonbinding goals are easy to implement and ubiquitous in practice. These goals have been shown to improve individual performance, but it remains to be seen if such goals are effective in team production when there is production complementarity among workers. Methodology: We first develop a theoretical model where goals act as reference points for workers’ intrinsic motivation to complete the task. We then test our hypotheses in a controlled, human-subjects experiment. In our experiment, participants act as managers or workers, and we examine the impact of nonbinding goals on team outcomes. Results: Consistent with our model, we find evidence that team production does increase when managers are able to set goals. This effect is strongest when goals are challenging but attainable for weak-link workers. However, we also find evidence that many managers assign goals that are too challenging for weak-link workers, resulting in suboptimal team production, lower profits, and higher wasted performance (performance above the weak-link level). Managerial implications: Our analysis indicates that goals are effective motivators in teams, but some managers may have difficulty overcoming personal biases when setting goals. The task of setting team goals is more complex than setting individual goals, and many managers can benefit from training on how to set good goals for the team. Moreover, our finding that suboptimal goals also increase wasted performance suggests that improving goal-setting strategies is especially important in production settings where overperformance is costly for the firm (scrap, energy use, inventory costs, lower prices as a result of oversupply, etc.).

Supply Chain Thinking in Healthcare: Lessons and Outlooks

2020 ◽  
Author(s):  
Lidia Betcheva ◽  
Feryal Erhun ◽  
Houyuan Jiang
Keyword(s):  
Supply Chain ◽  
Supply Chain Management ◽  
Supply Chains ◽  
Healthcare Delivery ◽  
Healthcare Services ◽  
Lessons Learned ◽  
Problem Definition ◽  
Healthcare Organizations ◽  
Chain Management ◽  
Managerial Implications

Problem definition: The lessons learned over decades of supply chain management provide an opportunity for stakeholders in complex systems, such as healthcare, to understand, evaluate, and improve their complicated and often inefficient ecosystems. Academic/practical relevance: The complexity in managing healthcare supply chains offers opportunities for important and impactful research avenues in key supply chain management areas such as coordination and integration (e.g., new care models), mass customization (e.g., the rise in precision medicine), and incentives (e.g., emerging reimbursement schemes), which might, in turn, provide insights relevant to traditional supply chains. We also put forward new perspectives for practice and possible research directions for the supply chain management community. Methodology: We provide a primer on supply chain thinking in healthcare, with a focus on healthcare delivery, by following a framework that is customer focused, systems based, and strategically orientated and that simultaneously considers clinical, operational, and financial dimensions. Our goal is to offer an understanding of how concepts and strategies in supply chain management can be applied and tailored to healthcare by considering the sector’s unique challenges and opportunities. Results: After identifying key healthcare stakeholders and their interactions, we discuss the main challenges facing healthcare services from a supply chain perspective and provide examples of how various supply chain strategies are being and can be used in healthcare. Managerial implications: By using supply chain thinking, healthcare organizations can decrease costs and improve the quality of care by uncovering, quantifying, and addressing inefficiencies.

Artificial Shortage in Agricultural Supply Chains

2021 ◽  
Author(s):  
Retsef Levi ◽  
Somya Singhvi ◽  
Yanchong Zheng
Keyword(s):  
Supply Chain ◽  
Dynamic Game ◽  
Consumer Welfare ◽  
Problem Definition ◽  
Theoretic Model ◽  
Government Interventions ◽  
Behavioral Game ◽  
Managerial Implications ◽  
The Government ◽  
Preemptive Effect

Problem definition: Price surge of essential commodities despite inventory availability, due to artificial shortage, presents a serious threat to food security in many countries. To protect consumers’ welfare, governments intervene reactively with either (i) cash subsidy, to increase consumers’ purchasing power by directly transferring cash; or (ii) supply allocation, to increase product availability by importing the commodity from foreign markets and selling it at subsidized rates. Academic/practical relevance: This paper develops a new behavioral game-theoretic model to examine the supply chain and market dynamics that engender artificial shortage as well as to analyze the effectiveness of various government interventions in improving consumer welfare. Methodology: We analyze a three-stage dynamic game between the government and the trader. We fully characterize the market equilibrium and the resulting consumer welfare under the base scenario of no government intervention as well as under each of the interventions being studied. Results: The analysis demonstrates the disparate effects of different interventions on artificial shortage; whereas supply allocation schemes often mitigate shortage, cash subsidy can inadvertently aggravate shortage in the market. Furthermore, empirical analysis with actual data on onion prices in India shows that the proposed model explains the data well and provides specific estimates on the implied artificial shortage. A counterfactual analysis quantifies the potential impacts of government interventions on market outcomes. Managerial implications: The analysis shows that reactive government interventions with supply allocation schemes can have a preemptive effect to reduce the trader’s incentive to create artificial shortage. Although cash subsidy schemes have recently gained wide popularity in many countries, we caution governments to carefully consider the strategic responses of different stakeholders in the supply chain when implementing cash subsidy schemes.

Supply-chain performance anomalies: Fairness concerns under private cost information

2016 ◽  
Vol 252 (1) ◽  
pp. 170-182 ◽  
Author(s):  
Fei Qin ◽  
Feng Mai ◽  
Michael J. Fry ◽  
Amitabh S. Raturi
Keyword(s):  
Supply Chain ◽  
Supply Chain Performance ◽  
Cost Information ◽  
Private Cost ◽  
Fairness Concerns

Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

2021 ◽  
Author(s):  
Brent B. Moritz ◽  
Arunachalam Narayanan ◽  
Chris Parker
Keyword(s):  
Supply Chain ◽  
Information Sharing ◽  
Human Behavior ◽  
Bullwhip Effect ◽  
Problem Definition ◽  
Supply Chain Costs ◽  
Cost Impact ◽  
Managerial Implications ◽  
The Cost ◽  
The Impact

Problem definition: We study the bullwhip effect and analyze the impact of human behavior. We separate rational ordering in response to increasing incoming orders from irrational ordering. Academic/practical relevance: Prior research has shown that the bullwhip effect occurs in about two-thirds of firms and impacts profitability by 10%–30%. Most bullwhip mitigation efforts emphasize processes such as information sharing, collaboration, and coordination. Previous work has not been able to separate the impact of behavioral ordering from rational increases in order quantities. Methodology: Using data from a laboratory experiment, we estimate behavioral parameters from three ordering models. We use a simulation to evaluate the cost impact of bullwhip behavior on the supply chain and by echelon. Results: We find that cost increases are not equally shared. Human biases (behavioral ordering) at the retailer results in higher relative costs elsewhere in the supply chain, even as similar ordering by a wholesaler, distributor, or factory results in increased costs within that echelon. These results are consistent regardless of the behavioral models that we consider. The cognitive profile of the decision maker impacts both echelon and supply chain costs. We show that the cost impact is higher as more decision makers enter a supply chain. Managerial implications: The cost of behavioral ordering is not consistent across the supply chain. Managers can use the estimation/simulation framework to analyze the impact of human behavior in their supply chains and evaluate improvement efforts such as coordination or information sharing. Our results show that behavioral ordering by a retailer has an out-sized impact on supply chain costs, which suggests that upstream echelons are better placed to make forecasting and replenishment decisions.

Contract Unobservability and Downstream Competition

2020 ◽  
Author(s):  
Xi Li ◽  
Qian Liu
Keyword(s):  
Supply Chain ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
Common Knowledge ◽  
Wholesale Price ◽  
Problem Definition ◽  
Supply Chain Performance ◽  
Supply Chain Contracts ◽  
Managerial Implications ◽  
The Right

Problem definition: In this paper, we consider a supply chain with a manufacturer and two retailers who are contracted through wholesale prices or two-part tariffs. We depart from the existing literature by assuming that contract terms between the manufacturer and a retailer are not observed by the rival retailer. Academic/practical relevance: Although the existing literature typically assumes that they are common knowledge in the market, contract terms may not be observed by rival retailers under certain circumstances. This paper contributes to the literature by studying the effect of contract unobservability on supply chain performance. Methodology: We use game-theoretical methods to find the equilibrium. When there are multiple equilibria, we adopt passive beliefs as an equilibrium-refinement criterion. Results: We find that certain established results regarding observable supply chain contracts do not always apply when those contracts become unobservable to competing retailers. In particular, compared with when using two-part tariff contracts, the manufacturer may benefit from using wholesale-price contracts when contract terms are unobservable. Moreover, the total industry profit may increase under wholesale-price contracts. Managerial implications: Our results offer an alternative explanation for the popularity of wholesale-price contracts and suggest that members of the supply chain must take unobservability into account when selecting the right contracts. We also offer new insights into buyback contracts and downstream mergers under unobservable contracts.

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