Influencing Adoption Patterns via Contract Structures in High-Tech Supply Chains

An original equipment manufacturer (OEM) who adopts a new technology or component product may bring various externalities to other OEM buyers and incentivize them to make similar adoption decisions. Positive correlation of adoptions can be harmful for the seller and buyers, as it can lead to adoption rush or delay, which results in demand-supply mismatch and may undermine the seller’s ability to reinvest in R&D. Sellers thus would like to influence buyer behavior when introducing a new product. However, they often have little pricing power to implement effective intertemporal pricing strategies in supply chains in which prices are negotiated. We propose that sellers can influence buyer behavior through the structure of contract—i.e., a fixedor renegotiable-price contract—and we support this by empirical analysis. Using a two-period, game-theoretic model, we find that (1) contract structure can affect the pace of adoption in different ways, and (2) the optimal contract choice depends on the strength of externality, the strength of seller competition, buyer bargaining power, and the size of buyer group. [