Mere Choice effect: Improving supply chain performance using contract choice

Abstract

Coordinating supply chain contracts (like Revenue Sharing, Buyback, Two part tariff, Quantity Discount etc) in bilateral monopolies are theoretically expected to incite the buyer into ordering the integrated supply chain profit maximizing quantity. These contracts circumvent the problem of double marginalization attributed to the wholesale price contract. Recent experimental results, however, suggest that not all contracts are as successful in coordinating a supply chain as theoretically expected and fall short of optimality. While these results examine the performance of each of these contracts in isolation, in this paper, we focus on situations where choice across contracts is possible. We present buyers with a menu of contracts each having the same expected profits. We experimentally establish that the act of providing contract choice to buyers considerably improves supply chain performance in high margin situations. This improvement is attributed to usage of ‘Affect’ heuristic by the decision makers in making their ordering decisions. We empirically show that the relative risk and return judgments determine the ordering quantities when contract choice is provided. This result has major supply chain strategy implications in that it advocates providing higher flexibility to buyers to improve supply chain performance.