Contracting in Supply Chains: A Laboratory Investigation

T coordination of supply chains by means of contracting mechanisms has been extensively explored theoretically but not tested empirically. We investigate the performance of three commonly studied supply chain contracting mechanisms: the wholesale price contract, the buyback contract, and the revenue-sharing contract. The simplified setting we consider utilizes a two-echelon supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and delivery occurs instantaneously. We compare the three mechanisms in a laboratory setting using a novel design that fully controls for strategic interactions between the retailer and the supplier. Results indicate that although the buyback and revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and revenue-sharing contracts are mathematically equivalent, they do not generally result in equivalent supply chain performance.