An Experimental Investigation of Pull Contracts in Supply Chains

Abstract

I conduct an investigation of supply chain contracts utilized in a setting where a supplier uses its inventory to directly satisfy a retailer's demand. These contracts, known as “pull” contracts, have increased in popularity in practice but have not been studied experimentally. I study three pull contracts in a controlled laboratory environment: a wholesale price contract and two coordinating contracts. The data suggest that the theoretical benefit of the two coordinating contracts over the wholesale price contract is lower than expected, which agrees with past experimental studies. The data also imply that retailers, in the two coordinating contracts, exhibit a systematic bias stemming from observing certain feedback. In an effort to formally model this, I develop a model based on the notion that retailers make biased decisions after observing both certain payments to suppliers and how far their supplier's stocking quantity is from realized demand. I then show that this model fits the data reasonable well using maximum-likelihood estimation. Lastly, I conduct an additional experimental treatment that represents this model, by restricting feedback pertaining to payments made to suppliers and realized demand, and find that retailers make significantly better decisions, leading to higher profits.

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