Bargaining in Supply Chains

We study experimentally bargaining in a multiple-tier supply chain with horizontal competition and sequential bargaining between tiers. Our treatments vary the cost differences between firms in tiers 1 and 2. We measure how these underlying costs influence the efficiency, negotiated prices, and profit distribution across the supply chain, as well as the consistency of these outcomes with existing theory. We find that the structural issue of cost differentials dominates personal characteristics in explaining outcomes, with profits in a tier generally increasing with decreased competition in the tier and increasing with decreased competition in alternate tiers. The balanced principal model of supply chain bargaining does a good job explaining our data, and it outperforms the common assumption of leader-follower negotiations. We find a significant anchoring effect from a firm's first bid but no effect of the sequence of those bids, no evidence of failure to close via escalation of commitment, and mixed results for a deadline effect. We also find an interesting asymmetry between the buy and sell sides in employed bidding strategy. All firms make predominantly concessionary offers after the initial anchor; however, sell-side firms that engage in aggressive anticoncessionary bidding successfully increase prices while not compromising closure rates. Buy-side firms achieve much smaller price changes from anticoncessionary tactics and risk reduced closure, yielding no net benefit. This paper was accepted by Yossi Aviv, operations management.