Do Competing Suppliers Maximize Profits as Theory Suggests? An Empirical Evaluation

TL;DRAbstract

This research compares results from laboratory experiments with predictions from theory for decisions made by competing suppliers. We consider a supply chain in which a single buyer outsources the manufacture of a commodity product to suppliers not on the basis of price, but rather on service. Three different criteria on which suppliers compete are evaluated: 1) a guaranteed specific inventory fill-rate, 2) guaranteed level of base-stock, and 3) a parameter optimizing the supply chain in the buyer’s favor. Our results show that in most cases, suppliers’ decisions are significantly different than the Nash equilibrium, meaning that they do not maximize profit. We examine loss aversion as an influence that might offer an explanation for this behavior

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