Harmony in Competition: On Preferences for Contractual Forms in Supply Chains

Abstract

The supply chain contracting literature has focused on incentive contracts designed to align supply chain members' individual interests. A key finding of this literature is that members' preferences for contractual forms are at odds: the upstream supplier prefers more complex contracts that can coordinate the supply chain, with the simple 'wholesale price only' contracts eliminated by market force; however, the downstream retailer prefers the wholesale price only contract because it leaves more surplus (than a coordinating contract) that the retailer can get. This paper addresses the question: Under what circumstances do suppliers and retailers prefer the same contractual form? Our analysis suggests that both sides of the supply chain may prefer the same 'quantity discount' contract, thereby eliminating the conflicts of interests that otherwise typify contracting situations. More interesting still is that both sides may also prefer the wholesale price only contract, a result that is new to the literature.