The Handbook of Behavioral Operations

13Buyer–Supplier Interactions

Kay‐Yut Chen¹ and Diana Wu²

¹ College of Business, University of Texas at Arlington, Arlington, TX, USA

² School of Business, University of Kansas, Lawrence, KS, USA

13.1 Introduction

This chapter reviews and discusses the behavioral operations literature on the interactions between buyers and suppliers under various information and incentives conditions. The theoretical literature on supply chain coordination examines how win‐win situations can be achieved through information sharing among channel members and the design of incentive alignment schemes (i.e. contracting). This stream of research commonly follows the stringent rationality assumptions in game theory to model individual firms in a supply chain as self‐interested optimizers of expected payoffs.

In reality, however, behaviors of channel partners have been shown to deviate significantly from rational theories. Human decision makers may not be able to optimize or think strategically due to cognitive limitations. They may exhibit psychological biases such as anchoring, react to information without the proper probabilistic inferences, or misestimate other decision makers’ responses. They may also care about social preferences such as fairness and reciprocity that are beyond one’s own pecuniary interests. Our discussion in the chapter is centered on how these behavioral departures impact the empirical channel relationships, compared with benchmarks from the normative theories. In particular, ...