The performance of decentralized supply chain under wholesale purchase and option mechanisms: experimental study

Abstract

The goal of this research is to validate whether or not option contract can coordinate the supply chain better than wholesale purchase contract, i.e. whether the profit under option contract for the supply chain is higher and whether every participant can earn more. For that purpose economical experiment was conducted on the basis of Graduate School of Management. The results of experiment show that generally option contracts cannot coordinate supply chain better and do not allow the parties to earn higher profit. However, if at least one of the participants has prior knowledge of the option theory, that helps to improve not only that participant’s profit, but also the profit of the counterparty and the efficiency of the supply chain as total. Also the experiment shows that even when some of the parameters like prices are not chosen optimally for option contract further optimal choice of the inventory level improves the situation significantly, allowing the supplier and the retailer to earn more. The situation is different for the wholesale purchase contract: when the retailer starts moving towards optimal solution that decreases the profit of the supplier and efficiency of the supply chain. Interestingly, simple wholesale purchase contract performs much better than the theory predicts. The probable reason for that is experiment design: the contractors were bound for the whole period of experiment, thus the cooperation was of their concern and it allowed achieving rather good results.