Experiments on the Power of Commitment and Fairness Priming in Supply Chain Decisions

We conduct decision experiments to study the effects of commitment and fairness priming in a manufacturer-retailer supply chain. In each period, the manufacturer offers a wholesale price contract, and the retailer, who faces the newsvendor problem, reacts by choosing her order quantity to satisfy probabilistic demand. The retailer has the chance to reject the contract, in which case both firms receive zero profits. The firms are represented by human subjects who interact repeatedly throughout the experiment, capturing a long-run relationship. Our first study focuses on the power of commitment to a decision (wholesale price decision and quantity decision) for five periods. We find the committing firm to obtain strategic advantage over the other, and to increase its profit share. Our second study explores what happens if the subjects are primed with an exogenously-given fair contract at the beginning of the interaction. We conjecture the relatively fair profit shares during these initial periods to act as an anchor that will affect the subjects’ subsequent decisions. Contrary to our expectations, following fairness priming, the manufactures acted more aggressively and captured an even higher share of total profits while the retailers failed to counteract. To shed light on the findings of both studies, we present regression models that explain the retailer’s contract rejection, underorder and overorder tendencies