Study on new coordination mechanisms of generalized supply chains with loss-averse agents
CCDC'09 Proceedings of the 21st annual international conference on Chinese control and decision conference
Limited Memory, Categorization, and Competition
Marketing Science
Trust in Forecast Information Sharing
Management Science
The Benefit of Uniform Price for Branded Variants
Marketing Science
Bounded Rationality in Service Systems
Manufacturing & Service Operations Management
Differentiate or Imitate? The Role of Context-Dependent Preferences
Marketing Science
Marketing Science
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When 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.