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Pricing Indirect Behavioral Effects in a Supply Chain: From the Perspective of “Contracts as Reference Point”

In: Operations Research Proceedings 2012

Author

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  • Isik Bicer

    (University of Lausanne)

Abstract

We consider a supply chain with one supplier and one retailer in which the supplier produces a single product demanded by the retailer. The two parties in the supply chain negotiate on a contract for the delivery of the product, and the contract specifies the number of firm commitments and options. The retailer who aims to increase his own profit without any concern about the supplier’s profitability increases the uncertainty on the supplier’s side by changing the cost structure of the contract. In this research, we integrate "contracts as reference points" theory (Hart and Moore Ouarterly J Econ 123:1–48, 2008) into quantity flexible contracts to price the indirect effects of retailer’s behavior on his own payoff function. Under voluntary compliance, we show that there is a trade-off for the retailer between decreasing the option cost and increasing the indirect behavioral cost that is imposed by the supplier when the uncertainty on her payoff function is increased by the retailer. Apart, we also show that the indirect cost of the retailer increases as the supplier becomes more critical to the retailer.

Suggested Citation

  • Isik Bicer, 2014. "Pricing Indirect Behavioral Effects in a Supply Chain: From the Perspective of “Contracts as Reference Point”," Operations Research Proceedings, in: Stefan Helber & Michael Breitner & Daniel Rösch & Cornelia Schön & Johann-Matthias Graf von der Schu (ed.), Operations Research Proceedings 2012, edition 127, pages 549-554, Springer.
    • Handle: RePEc:spr:oprchp:978-3-319-00795-3_82
    DOI: 10.1007/978-3-319-00795-3_82
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