IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v249y2016i3p1033-1049.html
   My bibliography  Save this article

Reference points in revenue sharing contracts—How to design optimal supply chain contracts

Author

Listed:
  • Becker-Peth, Michael
  • Thonemann, Ulrich W.

Abstract

Coordinating supply chains is an important goal for contract designers because it enables the channel members to increase their profits. Recently, many experimental studies have shown that behavioral aspects have to be taken into account when choosing the type of contract and specifying the contract parameters. In this paper, we analyze behavioral aspects of revenue-sharing contracts. We extend the classical normative decision model by incorporating reference-dependent valuation into the decision model and show how this affects inventory decisions. We conduct different lab experiments to test our model. As a result, human inventory decisions deviate from classical normative predictions, and we find evidence for reference-dependent valuation of human decision makers. We also show how contract designers can use the insights we gained to design better contracts.

Suggested Citation

  • Becker-Peth, Michael & Thonemann, Ulrich W., 2016. "Reference points in revenue sharing contracts—How to design optimal supply chain contracts," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1033-1049.
  • Handle: RePEc:eee:ejores:v:249:y:2016:i:3:p:1033-1049
    DOI: 10.1016/j.ejor.2015.06.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221715005214
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ejor.2015.06.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Elena Katok & Diana Yan Wu, 2009. "Contracting in Supply Chains: A Laboratory Investigation," Management Science, INFORMS, vol. 55(12), pages 1953-1968, December.
    2. AJ A. Bostian & Charles A. Holt & Angela M. Smith, 2008. "Newsvendor "Pull-to-Center" Effect: Adaptive Learning in a Laboratory Experiment," Manufacturing & Service Operations Management, INFORMS, vol. 10(4), pages 590-608, July.
    3. Teck-Hua Ho & Noah Lim & Tony Haitao Cui, 2010. "Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis," Management Science, INFORMS, vol. 56(11), pages 1891-1910, November.
    4. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    5. Giannoccaro, Ilaria & Pontrandolfo, Pierpaolo, 2004. "Supply chain coordination by revenue sharing contracts," International Journal of Production Economics, Elsevier, vol. 89(2), pages 131-139, May.
    6. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
    7. Stewart, TJ, 1992. "A critical survey on the status of multiple criteria decision making theory and practice," Omega, Elsevier, vol. 20(5-6), pages 569-586.
    8. Yao, Z. & Leung, Stephen C.H. & Lai, K.K., 2008. "Manufacturer's revenue-sharing contract and retail competition," European Journal of Operational Research, Elsevier, vol. 186(2), pages 637-651, April.
    9. Gary E. Bolton & Axel Ockenfels & Ulrich W. Thonemann, 2012. "Managers and Students as Newsvendors," Management Science, INFORMS, vol. 58(12), pages 2225-2233, December.
    10. Noah Lim & Teck-Hua Ho, 2007. "Designing Price Contracts for Boundedly Rational Customers: Does the Number of Blocks Matter?," Marketing Science, INFORMS, vol. 26(3), pages 312-326, 05-06.
    11. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    12. Gary E. Bolton & Elena Katok, 2008. "Learning by Doing in the Newsvendor Problem: A Laboratory Investigation of the Role of Experience and Feedback," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 519-538, September.
    13. Li, Sijie & Hua, Zhongsheng, 2008. "A note on channel performance under consignment contract with revenue sharing," European Journal of Operational Research, Elsevier, vol. 184(2), pages 793-796, January.
    14. Mirko Kremer & Stefan Minner & Luk N. Van Wassenhove, 2010. "Do Random Errors Explain Newsvendor Behavior?," Manufacturing & Service Operations Management, INFORMS, vol. 12(4), pages 673-681, July.
    15. Pan, Kewen & Lai, K.K. & Leung, Stephen C.H. & Xiao, Di, 2010. "Revenue-sharing versus wholesale price mechanisms under different channel power structures," European Journal of Operational Research, Elsevier, vol. 203(2), pages 532-538, June.
    16. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    17. Maurice E. Schweitzer & Gérard P. Cachon, 2000. "Decision Bias in the Newsvendor Problem with a Known Demand Distribution: Experimental Evidence," Management Science, INFORMS, vol. 46(3), pages 404-420, March.
    18. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    19. Hämäläinen, Raimo P. & Luoma, Jukka & Saarinen, Esa, 2013. "On the importance of behavioral operational research: The case of understanding and communicating about dynamic systems," European Journal of Operational Research, Elsevier, vol. 228(3), pages 623-634.
    20. Teck-Hua Ho & Juanjuan Zhang, 2008. "Designing Pricing Contracts for Boundedly Rational Customers: Does the Framing of the Fixed Fee Matter?," Management Science, INFORMS, vol. 54(4), pages 686-700, April.
    21. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347-347.
    22. Xuanming Su, 2008. "Bounded Rationality in Newsvendor Models," Manufacturing & Service Operations Management, INFORMS, vol. 10(4), pages 566-589, May.
    23. Gurumurthy Kalyanaram & Russell S. Winer, 1995. "Empirical Generalizations from Reference Price Research," Marketing Science, INFORMS, vol. 14(3_supplem), pages 161-169.
    24. Chauhan, Satyaveer S. & Proth, Jean-Marie, 2005. "Analysis of a supply chain partnership with revenue sharing," International Journal of Production Economics, Elsevier, vol. 97(1), pages 44-51, July.
    25. Christoph H. Loch & Yaozhong Wu, 2008. "Social Preferences and Supply Chain Performance: An Experimental Study," Management Science, INFORMS, vol. 54(11), pages 1835-1849, November.
    26. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
    27. Tony Haitao Cui & Jagmohan S. Raju & Z. John Zhang, 2007. "Fairness and Channel Coordination," Management Science, INFORMS, vol. 53(8), pages 1303-1314, August.
    28. Winer, Russell S, 1986. "A Reference Price Model of Brand Choice for Frequently Purchased Products," Journal of Consumer Research, Oxford University Press, vol. 13(2), pages 250-256, September.
    29. Ockenfels, Axel & Selten, Reinhard, 2014. "Impulse balance in the newsvendor game," Games and Economic Behavior, Elsevier, vol. 86(C), pages 237-247.
    30. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    31. Kahneman, Daniel, 1992. "Reference points, anchors, norms, and mixed feelings," Organizational Behavior and Human Decision Processes, Elsevier, vol. 51(2), pages 296-312, March.
    32. Kunter, Marcus, 2012. "Coordination via cost and revenue sharing in manufacturer–retailer channels," European Journal of Operational Research, Elsevier, vol. 216(2), pages 477-486.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Feiyu Guo & Erbao Cao, 2020. "Does Reference Dependence Impact Intervention Mechanisms in Vaccine Markets?," Sustainability, MDPI, vol. 12(16), pages 1-28, August.
    2. Avinadav, Tal, 2020. "The effect of decision rights allocation on a supply chain of perishable products under a revenue-sharing contract," International Journal of Production Economics, Elsevier, vol. 225(C).
    3. Lambertini, Luca, 2018. "Coordinating research and development efforts for quality improvement along a supply chain," European Journal of Operational Research, Elsevier, vol. 270(2), pages 599-605.
    4. Vipin, B. & Amit, R.K., 2017. "Loss aversion and rationality in the newsvendor problem under recourse option," European Journal of Operational Research, Elsevier, vol. 261(2), pages 563-571.
    5. Ding, Huiping & Wang, Li & Zheng, Lucy, 2018. "Collaborative mechanism on profit allotment and public health for a sustainable supply chain," European Journal of Operational Research, Elsevier, vol. 267(2), pages 478-495.
    6. Wei, Ying & Xiong, Sijia & Li, Feng, 2019. "Ordering bias with two reference profits: Exogenous benchmark and minimum requirement," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 128(C), pages 229-250.
    7. Vipin, B. & Amit, R.K., 2019. "Describing decision bias in the newsvendor problem: A prospect theory model," Omega, Elsevier, vol. 82(C), pages 132-141.
    8. Kalakbandi, Vinay Kumar, 2018. "Managing the misbehaving retailer under demand uncertainty and imperfect information," European Journal of Operational Research, Elsevier, vol. 269(3), pages 939-954.
    9. Liu, Chao & Chen, Weidong, 2019. "Decision making in green supply chains under the impact of the stochastic and multiple-variable dependent reference point," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 128(C), pages 443-469.
    10. Ubøe, Jan & Andersson, Jonas & Jörnsten, Kurt & Lillestøl, Jostein & Sandal, Leif, 2017. "Statistical testing of bounded rationality with applications to the newsvendor model," European Journal of Operational Research, Elsevier, vol. 259(1), pages 251-261.
    11. Choi, Tsan-Ming & Guo, Shu, 2020. "Is a ‘free lunch’ a good lunch? The performance of zero wholesale price-based supply-chain contracts," European Journal of Operational Research, Elsevier, vol. 285(1), pages 237-246.
    12. Zhai, Yue & Choi, Tsan-Ming & Shao, Saijun & Xu, Su Xiu & Huang, George Q., 2020. "Spatial-temporal hedging coordination in prefabricated housing production," International Journal of Production Economics, Elsevier, vol. 229(C).
    13. Caballero, William N. & Lunday, Brian J., 2019. "Influence modeling: Mathematical programming representations of persuasion under either risk or uncertainty," European Journal of Operational Research, Elsevier, vol. 278(1), pages 266-282.
    14. Castañeda, Jaime Andrés & Brennan, Mark & Goentzel, Jarrod, 2019. "A behavioral investigation of supply chain contracts for a newsvendor problem in a developing economy," International Journal of Production Economics, Elsevier, vol. 210(C), pages 72-83.
    15. Avinadav, Tal & Chernonog, Tatyana & Ben-Zvi, Tal, 2019. "The effect of information superiority on a supply chain of virtual products," International Journal of Production Economics, Elsevier, vol. 216(C), pages 384-397.
    16. Jain, Tarun & Hazra, Jishnu & Cheng, T.C.E., 2018. "Sourcing under overconfident buyer and suppliers," International Journal of Production Economics, Elsevier, vol. 206(C), pages 93-109.
    17. Kirshner, Samuel N. & Shao, Lusheng, 2018. "Internal and external reference effects in a two-tier supply chain," European Journal of Operational Research, Elsevier, vol. 267(3), pages 944-957.
    18. Tatyana Chernonog, 2021. "Strategic information sharing in online retailing under a consignment contract with revenue sharing," Annals of Operations Research, Springer, vol. 300(2), pages 621-641, May.
    19. Xia, Qiu & Zhi, Bangdong & Wang, Xiaojun, 2021. "The role of cross-shareholding in the green supply chain: Green contribution, power structure and coordination," International Journal of Production Economics, Elsevier, vol. 234(C).
    20. Ma, Peng & Gong, Yeming & Mirchandani, Prakash, 2020. "Trade-in for remanufactured products: Pricing with double reference effects," International Journal of Production Economics, Elsevier, vol. 230(C).
    21. repec:ers:ijebaa:v:iv:y:2016:i:2:p:97-106 is not listed on IDEAS
    22. Michael Krapp & Johannes B. Kraus, 2019. "Coordination contracts for reverse supply chains: a state-of-the-art review," Journal of Business Economics, Springer, vol. 89(7), pages 747-792, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elahi, Ehsan & Lamba, Narasimha & Ramaswamy, Chinthana, 2013. "How can we improve the performance of supply chain contracts? An experimental study," International Journal of Production Economics, Elsevier, vol. 142(1), pages 146-157.
    2. 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.
    3. Shan Li & Kay‐Yut Chen, 2020. "The Commitment Conundrum of Inventory Sharing," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 353-370, February.
    4. Yinghao Zhang & Karen Donohue & Tony Haitao Cui, 2016. "Contract Preferences and Performance for the Loss-Averse Supplier: Buyback vs. Revenue Sharing," Management Science, INFORMS, vol. 62(6), pages 1734-1754, June.
    5. Tony Haitao Cui & Guangwen Kong & Behrooz Pourghannad, 2020. "Is Simplicity the Ultimate Sophistication? The Superiority of Linear Pricing," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1767-1788, July.
    6. Kalakbandi, Vinay Kumar, 2018. "Managing the misbehaving retailer under demand uncertainty and imperfect information," European Journal of Operational Research, Elsevier, vol. 269(3), pages 939-954.
    7. Ockenfels, Axel & Selten, Reinhard, 2014. "Impulse balance in the newsvendor game," Games and Economic Behavior, Elsevier, vol. 86(C), pages 237-247.
    8. Shan Li & Kay-Yut Chen & Ying Rong, 2020. "The Behavioral Promise and Pitfalls in Compensating Store Managers," Management Science, INFORMS, vol. 66(10), pages 4899-4919, October.
    9. Christian Köster & Heike Y. Schenk-Mathes, 2016. "Explanatory and predictive power of the adaptive learning model: average and heterogeneous behavior in a newsvendor context," Journal of Business Economics, Springer, vol. 86(4), pages 361-387, May.
    10. Kirshner, Samuel N. & Shao, Lusheng, 2018. "Internal and external reference effects in a two-tier supply chain," European Journal of Operational Research, Elsevier, vol. 267(3), pages 944-957.
    11. Karen Donohue & Özalp Özer, 2020. "Behavioral Operations: Past, Present, and Future," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 191-202, January.
    12. Dertwinkel-Kalt, Markus & Köster, Mats, 2017. "Salient compromises in the newsvendor game," Journal of Economic Behavior & Organization, Elsevier, vol. 141(C), pages 301-315.
    13. Li Chen & A. Gürhan Kök & Jordan D. Tong, 2013. "The Effect of Payment Schemes on Inventory Decisions: The Role of Mental Accounting," Management Science, INFORMS, vol. 59(2), pages 436-451, September.
    14. Castañeda, Jaime Andrés & Gonçalves, Paulo, 2018. "Ordering behavior in a newsstand experiment," International Journal of Production Economics, Elsevier, vol. 197(C), pages 186-196.
    15. Özalp Özer & Yanchong Zheng & Yufei Ren, 2014. "Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States," Management Science, INFORMS, vol. 60(10), pages 2435-2460, October.
    16. Vipin, B. & Amit, R.K., 2019. "Describing decision bias in the newsvendor problem: A prospect theory model," Omega, Elsevier, vol. 82(C), pages 132-141.
    17. Michael Becker-Peth & Elena Katok & Ulrich W. Thonemann, 2013. "Designing Buyback Contracts for Irrational But Predictable Newsvendors," Management Science, INFORMS, vol. 59(8), pages 1800-1816, August.
    18. Abdolkarim Sadrieh & Guido Voigt, 2017. "Strategic risk in supply chain contract design," Journal of Business Economics, Springer, vol. 87(1), pages 125-153, January.
    19. Teck-Hua Ho & Noah Lim & Tony Haitao Cui, 2010. "Reference Dependence in Multilocation Newsvendor Models: A Structural Analysis," Management Science, INFORMS, vol. 56(11), pages 1891-1910, November.
    20. Dmitri Kuksov & Kangkang Wang, 2014. "The Bright Side of Loss Aversion in Dynamic and Competitive Markets," Marketing Science, INFORMS, vol. 33(5), pages 693-711, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:249:y:2016:i:3:p:1033-1049. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/eor .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.