Value of screening in procurement mechanism: An experimental study

Abstract

Procurement mechanisms are widely employed and recommended for use in supply chain management practices. This study examines a retailer’s decision to design a separating mechanism (as opposed to pooling mechanism) which is applied when buying from a supplier whose production cost information is private. The retailer’s decision is based on the value of screening of the separating mechanism, as it allows the retailer to screen the supplier’s private cost information, whereas the pooling mechanism does not. We conducted a laboratory experiment to investigate the retailer’s decision-making behaviors, the supplier’s decision behaviors, and the value of screening. We found that the observed value of screening is negligible and significantly lower than predicted given a large market size; however, it is substantially higher than predicted given a medium market size. According to the behavioral model analysis, this effect is mainly caused by the supplier’s fairness concerns; the screening increases the supplier’s fairness concern when operating in a large market, but decreases it when operating in a medium sized market. The results imply that a retailer should use a separating mechanism if the screening reduces the supplier’s fairness concern; otherwise, a pooling mechanism suffices.