Designing Price Contracts for Boundedly Rational Customers: Does the Number of Blocks Matter?
AbstractWhen designing price contracts, one of the major questions confronting managers is how many blocks there should be in the contract. We investigate this question in the setting of a manufacturer-retailer dyad facing a linear deterministic consumer demand. Theoretical marketing models predict that the manufacturer's profits rise dramatically when the number of blocks in the contract is increased from one to two because both channel efficiency and its share of channel profits increase. However, increasing the number of blocks to three yields no incremental profits. We test these predictions experimentally and find that increasing the number of blocks from one to two raises channel efficiency but not the manufacturer's share of profits. Surprisingly, having three blocks in the contract increases channel efficiency even further and also gives the manufacturer a slightly higher share of profits. We show that these results can be explained by a quantal response equilibrium model in which the manufacturer accounts for noisy best response due to nonpecuniary payoff components in the retailer's utility. We also show that the retailer is sensitive to the counterfactual profits it could have earned if it were charged a lower marginal price for earlier blocks in the multiple-block contract.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by INFORMS in its journal Marketing Science.
Volume (Year): 26 (2007)
Issue (Month): 3 (05-06)
quantity discounts; price contracts; quantal response equilibrium; experimental economics; behavioral economics;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Teck-Hua Ho & Xuanming Su, 2009. "Peer-Induced Fairness in Games," American Economic Review, American Economic Association, vol. 99(5), pages 2022-49, December.
- Wu, Diana Yan, 2013. "The impact of repeated interactions on supply chain contracts: A laboratory study," International Journal of Production Economics, Elsevier, vol. 142(1), pages 3-15.
- Anne Coughlan & S. Choi & Wujin Chu & Charles Ingene & Sridhar Moorthy & V. Padmanabhan & Jagmohan Raju & David Soberman & Richard Staelin & Z. Zhang, 2010. "Marketing modeling reality and the realities of marketing modeling," Marketing Letters, Springer, vol. 21(3), pages 317-333, September.
- Avi Goldfarb & Teck-Hua Ho & Wilfred Amaldoss & Alexander Brown & Yan Chen & Tony Cui & Alberto Galasso & Tanjim Hossain & Ming Hsu & Noah Lim & Mo Xiao & Botao Yang, 2012. "Behavioral models of managerial decision-making," Marketing Letters, Springer, vol. 23(2), pages 405-421, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.