The impact of repeated interactions on supply chain contracts: A laboratory study

Abstract

Abstract In this laboratory study, we investigate the interactive behaviors that develop over a perceived long-term contractual relationship. Specifically, three types of contracts are examined under a two-echelon supply chain setting with stochastic demand: wholesale price contracts, buyback contracts and revenue-sharing contracts. The supply chain contracting theory has demonstrated that the simple linear price contract is inefficient; whereas the latter two contracts can coordinate the channel through risk-sharing, and they are mathematically equivalent. We propose an experimental design that controls for individual decision biases to isolate the behavioral impact of repeated negotiations. Our experimental results indicate that participants systematically deviate from predictions by the normative model that assumes a one-shot interaction between self-interested players. We find that when future opportunities to punish are available, social preferences for fairness and reciprocity are reinforced; and reputation-building behaviors are motivated to achieve long-term economic benefits. As a result, the performance of the overall supply chain is enhanced. Moreover, we observe that buyback contracts behave differently from revenue-sharing contracts by inducing higher order quantities over time.