Capacity Reservation and Wholesale Price Contracts under Forecast Sharing: A Behavioral Assessment

Abstract

We study a supply chain setup in which a buyer has private end customer demand information that she can share with the supplier. The demand information is relevant to the supplier's capacity decision. We address the question of whether the supplier benefits from installing nonlinear capacity reservation contracts rather than wholesale price contracts. We contribute to the literature by providing the first internally valid comparison of both contracts with human decision makers. We setup an experimental study with four treatments (both contracts as well as different supplier margins). From a supplier's perspective, we observe that the capacity reservation contract significantly outperforms the wholesale price contract; however, the supplier's benefit from using capacity reservation is much higher under low margins than under high margins. Regarding supply chain performance, the positive effect for the supplier exceeds the negative effect for the buyer in the low margin setting, while the two effects neutralize each other in the high margin setting. We identify behavioral factors explaining deviations from the theoretical predictions. In particular, we observe naïve anchoring and trust as strong behavioral drivers common to both contract types. Even though the complexity of the nonlinear contract results in weaker performance than that predicted by theory, our study reveals that suppliers can still benefit from installing them; thus, providing important managerial implications for the choice of the contract type.