Research On Supply Chain Contract Coordination And The Effect Of Social Preferences

A typical supply chain includes several independent agents, thus various contracts are widely used to align system decisions and achieve full efficiency. Theoretically, there are a lot of coordination contracts, but recent evidence based on laboratory experiments as well as some field studies showed that retailers have difficulty making optimal decisions even in the simplest settings. Furthermore, it is hard to guarantee practical results for more complex contracts. So the result of coordination contract in practice is our first research question. Buyback contract was first selected to test its practical effect through controlled experiments. Besides, in order to find the explanation for coordination failure, we observed individuals’ decision results and also analyzed their decision behavior based on collected data. However, buyback contract is only one kind of coordination contract, the universality of findings and conclusions still needs to be discussed. Therefore, revenue-sharing contract was tested in the same way. Through deep analysis and investigation for these two contracts, we achieved conclusions about the results of coordination contracts as well as the reason for their failure.Most supply chain contracting models are based on the assumption that agents only pursed the optimization of their own interest. However, studies in behavioral economics showed that individuals are not as selfish as assumed. They not only care about their own interest, also express concern for others’. Hence, different kinds of social preferences would manifest. As members in the supply chain, suppliers and retailers make decisions separately and purse their own profits. While in an entire supply chain, their decision and the market condition affect allocation profits between them. Members in supply chain need cooperation, but also compete with each other. Thus, our second issue is to investigate the effect of both reciprocity and status seeking on coordination results and decision behaviors. There are many types of coordination contract. We couldnot involve every kind of contract, so buyback contract was selected. Based on the decision model, hypothesis about the effect of social preferences on trading behaviors were achieved. Then, controlled experiments were designed to test theoretical predictions. The combination of theoretical derivation and empirical research made conclusion more persuasive. However, findings only based on one contract couldnot represent all kinds of coordination contracts. In order to make this study comprehensive and targeted, above research was repeated based on revenue-sharing contract. The ultimate aim was to obtain universal conclusions about the second issue.The main conclusions obtained in this paper are as follows:(1) The practical results of coordination contract deviated from theoretical predictions. First, the correlation between wholesale price and buyback price does not satisfy conditions to achieve coordination. Besides, the order quantity decided by retailers is significantly lower than coordination benchmark, which means buyback contract failed to coordinate supply chain system. Studies based on revenue-sharing contract showed wholesale price as well as shared revenue significantly deviate from the theoretical predictions. The order quantity decided by retailers is also significantly lower than coordination benchmark. Thus, in practice, the results of coordination contract deviated from theoretical prediction. Also it is concluded that coordination failure is neither an accidental phenomenon nor dependent on the type of contract.(2) The preferences of reciprocity and status seeking caused failure of contract coordination. According to investigate members’decision behavior under buyback contract, it was found that both retailers’order and profit gap in last period significantly affected wholesale price as well as buyback price. The order quantity was affected by the previous wholesale price, previous buyback price and their profit gap in last period. Therefore, individuals both showed concern for others’motivation and material differences. Under revenue-sharing contract, wholesale price and shared revenue were significantly affected by retailers’order and profit gap in last period. The previous wholesale price, previous shared revenue and profit gap affected the decision on order quantity together.(3) Members’objective function and decisions have changed, and this kind of change was continuous. Specifically, under buyback contract, their objective functions included concern for relationship and the pursuit for leading. Dynamic analysis about decision behaviors indicated that the change brought by social preferences was not temporary. It existed during the whole process and changed continuously. Therefore, buyback price positively correlated with current wholesale price, previous order and previous profit gap. The order quantity negatively correlated with current and previous wholesale price, and positively correlated with current and previous buyback price as well as profit gap in last period. Under revenue-sharing contract, shared revenue correlated with wholesale price and previous order quantity negatively. It also positively correlated with previous profit gap. The order quantity negatively correlated with both wholesale prices as well as shared revenue in current and previous period. Besides, it correlated with previous profit gap positively.(4) Different kinds of social preferences performanced variously during decision process. Through regression analysis of parameters’ dynamic, it was found individuals’ preferences showed different characteristics under various kinds of contracts.With the above findings, this research has generally made the following contributions:(1) We provided experimental results as feedback for theoretical studies on supply chain coordination. From laboratory test on buyback contract, order quantity in decentralized decision-making system is less than the amount under centralized condition. Thus buyback contract failed to coordinate supply chain system, which deviated from theoretical predictions. The similar phenomenon happened again in the empirical test for revenue-sharing contract. Hence, in practical, coordination contract failed to coordinate supply chain system and the failure is not accidental. Therefore, according to data results and experimental analysis, we not only test the theoretical models but also provide helpful feedback for future improvement on theoretical research.(2) The reason for coordination failure was explained from the perspective of social preferences theory. Since the failure of contract coordination is not accidental, we need to find its cause. From the perspective of social preferences theory, we identified individuals’ social attributes during decision process. It was concluded that their objective function changed due to the preferences of reciprocity and status seeking. Based on these, the existing theoretical models couldnot predict and explain individuals’behavior. We got a reasonable explanation for coordination failure.(3) Based on the theory of social preferences, models of buyback contract and revenue-sharing contract were extended. Because of the failure, it is essential to modify and improve theoretical models for contract coordination. We extended both models for buyback contract and revenue-sharing contract by introducing the concern for relationship and leading status into members’ objective function. From which, the modified predictions for individual’s behavior were achieved and supported by empirical results. Thus the extended models made sense and also have theoretical significance.(4) The influence of social preferences on contract coordination was summarized. With uncertainty demand, we discussed the impact of social preferences on contract coordination. Unlike previous results, neither reciprocity nor status seeking improve efficiency for the system and individuals. They made the performance worse, decreased decentralized order and failed to coordinate the whole supply chain. But we still got some conclusions consistent with previous research, which were mainly reflected in the dynamic of preference parameters.(5) The theory of social preferences was enriched through finding the unique dynamic characteristics of different preferences. For different contracts and different social preferences, we got interesting findings from analyzing individuals’ behavior. Although individuals purse relationship and leading status during the transaction process, these goals mixed with material results. Thus they would show different performance in practical. We described the dynamic characteristics for individuals’preferences, which enriched the theory of contract coordination and provided complement for social preferences theory.