Ex-ante versus ex-post buyback pricing: An experimental study

Abstract

We investigate behaviors and performance of a supply chain, in which a supplier uses buyback contracts to transact with a retailer under stochastic market demand. We compare ex-ante versus ex-post buyback pricing—the supplier decides the buyback price before demand realization in the former, but after demand realization in the latter. Theoretical analyses predict that the retailer order quantity and the supply chain efficiency are lower under ex-post buyback pricing. However, in experiments with human subjects playing both the supplier and retailer, we observe the opposite: the retailer order quantity and the supply chain efficiency are significantly higher under ex-post buyback pricing. Several behaviors are found significant. First, the supplier exhibits weaker advantageous fairness concern under ex-ante buyback pricing than under ex-post buyback pricing. Second, the supplier over-weights the buyback cost under the former, but under-weights (reciprocates) under the latter. Third, the retailer’s fairness concern is weaker under the latter. Fourth, the retailer exhibits trust behavior with the supplier under the latter. These drivers lead to less rejection and higher order quantity under ex-post buyback pricing than under ex-ante buyback pricing. Our results shed light on how human behaviors change with the decision timing and benefit supply chain performance.