A Game Theoretical Approach of Price Negotiation and Coordination in an Innovative Firm-Supplier Context: An Experimental Analysis

Abstract

AbstractThis article analyzes a sequential interaction between a firm and its supplier, involving negotiation in the first round and coordination between two different production activities in the second round. The evolution of the vertical relations in the manufacturing sectors reveals that the performance of the firms increasingly depends on these two dimensions. Price negotiation determines the share of the profits of the two actors, while coordination determines the performance of the overall chain. To model this sequential interaction between the supplier and the firm, we use the tools and concepts of game theory. While game theory usually considers the coordination problem as an isolated phenomenon, the originality of our work is that it examines the problem of in a context where coordination between agents is preceded by a negotiation phase. The model emphasizes the influence of the price negotiation on the coordination round. Several theoretical predictions are proposed, derived not only from the strict assumptions of game theory, but also from assumptions which relax those of game theory. These predictions are then experimentally tested. The results do not confirm the predictions of game theory. In fact, they are consistent with the predictions put forth as alternatives to the predictions of game theory. They show i) a propensity to maximize the performance of the chain, and ii) a propensity to arrive at an equitable share of the joint profit in the chain. Finally, though the experiment was not designed to study cross-cultural or international cases, the results suggest new research directions in this area.