Multidimensional Bargaining and Inventory Risk in Supply Chains: An Experimental Study

We study the impact of multidimensional bargaining and the location of inventory risk on the performance of a two-stage supply chain. We conduct a controlled human subjects experiment where a retailer and supplier either interact through ultimatum offers or dynamically bargain over contract terms, including a wholesale price and, potentially, an order quantity. We also manipulate whether the risk associated with unsold inventory lies with the retailer or the supplier or is endogenously determined in the bargaining process. One key insight is that supply chain efficiency is significantly higher when the order quantity is included in the negotiation and that, contrary to the normative theory, this leads to a Pareto improvement whereby both the supplier and retailer earn higher profits. A second important result, also counter to the normative theory, is that the party incurring the cost of unsold inventory always earns a lower profit than its counterpart, regardless of the bargaining environment or inventory risk location. To explain these data, we posit that retailers and suppliers are affected by an anchoring bias and demonstrate that it can explain many of our results.