Behavioral Modeling of Inventory Sharing Among Decentralized Retailers: An Experimental Study

Abstract

In recent years, inventory sharing, in addition to the traditional within-firm model, also appears in the sharing-economy model where different firms can share their inventory via an internet platform. Two prominent issues, shaping the behaviors of inventory sharing systems, are the commitment of the transfer price and the commitment to share. In this paper we investigate, through a behavioral lens, the decisions of transfer price, order quantity and the resulting supply chain efficiency in different transshipment commitment scenarios. In particular, we consider two transfer price commitment settings (ex-ante or ex-post, depending on whether or not the inventory transfer price is committed before demand realization) and two sharing commitment rules (automatic or voluntary, depending on whether or not inventory sharing are pre-committed). Our experimental results suggest that individuals set transfer prices much lower, and order much less, than what Nash equilibrium predicts. We also find substantial treatment effects where rational model can not explain. The magnitude of disparities relative to the Nash equilibrium prediction appears to be most substantial in the situation where transfer price is set ex ante and inventory sharing is voluntary. Motivated by these observations, we develop a behavioral model that incorporates quantal response equilibrium and fairness concerns. Empirical analysis indicates that our model provides a compelling explanation of the behavior observed in the data. This study provides implication on the design of the commitment rules in decentralized inventory sharing platforms.