Why Are Minimum Order Quantity Contracts Popular in Practice? A Behavioral Investigation

Problem definition: In theory, all coordinating contracts are equivalent; however, the minimum order quantity (MOQ) contract is observed to be more popular in practice. We seek understand whether decision makers as suppliers can perform better with MOQ and, if so, why. also study indeed preferred when subjects allowed choose among contracts. Academic/practical relevance: The behavioral operations management literature has established a trade-off between complex and simple noncoordinating This paper fills gap by studying how attenuates this trade-off. Methodology: First, we test role of given only single type optimize its parameters. Second, introduce treatments where subject demand risk hedged such that eliminated. Third, repeat two initial sets cognitive load survey single-variable versions those reduce burden. Fourth, novel experimental design where, each period, both offer parameters contract. Results: find (i) significantly compared other contracts; (ii) attributed inherent burden induced (iii) frequently over theoretically equivalent Managerial implications: show efficiency complexity mitigated simpler yet efficient Hence, there considerable benefit identifying contractual mechanisms ameliorate adverse effects complexity. explains prevalence terms supply