Essays on procurement contracting under private demand information [electronic resource]
Keywords: Management Science and Engineering

The goal of this dissertation is to bridge the gap between theory and practice in contract design under asymmetric demand information. There are certain assumptions in the literature that makes the practicality of the well-known results questionable: (1) The existing literature limits itself to contractual agreements between two parties in isolation of these parties' contracts with other members of the supply chain. (2) Contracts identified by theory as optimal are often arbitrarily complex while we observe that much simpler contracts prevail in practice. (3) The theoretical models in the literature do not always incorporate the behavioral influences. Therefore, relaxing these assumptions to better reflect the reality and examining how they change the existing results in the literature are especially relevant today. To serve this purpose, this dissertation combines theoretical and experimental analysis. The first part of the dissertation provides a comprehensive theoretical analysis of decentralized assembly systems under asymmetric demand information. We reveal new insights on the value of contract type (price-only versus complex), demand information (complete versus asymmetric), and contracting sequence (simultaneous versus sequential) to different players. We find that complex contracts increase the suppliers' aggregate profit, however, individual suppliers do not necessarily benefit from a complex contracting equilibrium. Moreover, intuition suggests that eliminating information asymmetry would be beneficial for the suppliers; but this holds only to a certain extent. Obtaining information may bring only marginal value to the suppliers, hence, may not be realistically justified, and under sequential contracting, a downstream supplier may prefer information asymmetry to complete information, especially when demand variability is high. In the second part of the dissertation, we study a two-tier supply chain with a single supplier and a single buyer to characterize the impact of contract complexity and asymmetric information on performance and to compare theoretical predictions to actual behavior in human subject experiments. The buyer, who faces a newsvendor setting, has better information on end-consumer demand as compared to the supplier. The supplier offers either a quantity discount contract (with two or three price blocks) or a price-only contract; contracts that are commonplace in practice, yet different in complexity. When a human supplier interacts with a computerized buyer, results show that, contrary to theoretical predictions, quantity discounts do not necessarily increase the supplier's profits. We also observe a more equitable distribution of profits between the supplier and the buyer than what theory predicts. These observations can be explained with the experience-weighted attraction learning model and three decision biases; probabilistic choice/bounded rationality, reinforcement bias, and the memory effect. Our results demonstrate that simpler contracts, such as a price-only contract or a quantity discount contract with a low number of price blocks, are sufficient for a supplier designing contracts under asymmetric demand information. Human-to-human interactions strengthen these results.