Supply contracting with risk-sensitive retailers under information asymmetry: An exploratory behavioral study

Abstract

In this paper, we explore a two-echelon supply chain with one upstream seller (supplier) and two downstream retailers selling a newsvendor type of fashion product. The retailers are the same except their degrees of risk sensitivity. In this supply chain, we examine the performance of the buyback contract via behavioral experiments in which the supplier is played by human subjects and the risk-sensitive retailers are computerized. We study the effect of profit margin and also demand dispersion under different game scenarios. Our behavioral experiments reveal that the human suppliers can be classified into three types, namely type I (the highly consistent and rational players), type II (the highly strategic players), and type III (naïve and highly irrational players). We further generate a few insights: (i) Decision-makers behave as type II players in the low profit margin scenarios but not in the high profit margin cases; (ii) there are no significant pieces of evidence on the existence of the demand dispersion effect and the game type effect on both type I and type III players; and (iii) the average profits earned by type I and type II decision-makers are similar, whereas type III decision-makers are the smallest in almost all cases. We believe that this paper provides many new insights on supply contracting with reference to the behavioral risk of human decision-makers. © 2014 John Wiley & Sons, Ltd.