A supply chain, which typically employs decentralized decision-making, iscoordinated if in the equilibrium firms make decisions that are system-wideoptimal. Such decisions, called the first-best, would be made if the supply chainwere centralized so that a single decision-maker could force all firms to takerecommended actions. Under decentralized decision-making, in order toimplement first-best one needs to impose a proper structure of incentives.Supply chain literature, building upon developments in mechanism design,proposes various coordination schemes in the applied business contexts. However,the empirical evidence, coming both from the real world and laboratory experiments,confronts many theoretical predictions. In particular, theoretically optimalcontracts are notably more complex than those used in the real world. Moreimportantly, in laboratory experiments the theoretically optimal contractsnot just fail to coordinate but, ironically, perform very close to the DoubleMarginalization benchmark. Thus, legitimate concerns regarding ability of theproposed schemes to coordinate in applied contexts arise. Thisdissertation focuses on some of the factors leading to coordination failuresand investigates their impact on the performance of a supply chain.Chapter "Contingent contract" analyzes a scenario when externalities, created by the third parties,force supply chain partners to use contracts contingent on revealedinformation. Most of the supply chain literature on coordination deals withperfect information models. The assumption of perfect information is usuallyjustified by instances of information sharing, observed in practice.Researchers conjecture that information sharing ensures perfect information.However, there exists empirical evidence that even under the ultimate form ofinformation sharing, when parties implement "open book accounting", revealed information may not be true.Unfortunately, there is always a possibility to misrepresent information.Notably, under perfect information sharing supply chain partners are likely tofind themselves in a situation when they essentially have no choice other thanto use a contract that delivers first-best provided that "openbooks" contain truth. The model of this chapter analyzesperformance of a supplier-buyer supply chain under the assumption thatquestioning each other's reports is prohibitively costly, while parties areaware of possible misrepresentation. Therefore, no matter who offers acontract, it cannot be a screening contract or anything else except acontingent contract that delivers "first-best", given revealed information. The outcome of thearising Bayesian game is distribution-specific, and can be very different fromthe conjectured performance of a "coordinating" contract.Chapter "Fairness and coordination failures in supply chain contracts" addresses a gap between performance of the contracts suggested bythe standard theory, which assumes fully rational profit-maximizing players,and existing data, obtained in the experimental tests of coordinatingcontracts. Numerous experimental studies findthat human decision-makers are neither perfectly rational norprofit-maximizers. While various behavioral factors, such as risk-and loss-aversion, counter-factual payoffs and more general social preferencescan greatly affect contracting outcomes, they cannot fully explain theexisting data. In the controlled laboratory environment, it is possible toeither completely eliminate some of these factors, or, at least, to significantlymitigate and control for them. What is not possible to eliminate, is the players'attitude to contracting outcomes, most commonly called "fairness concerns". The existing models, incorporatingfairness concerns into models, assume fairness concerns of players is commonknowledge. Realistically, how much a particular person cares about fairnesscannot be easily observed or measured and, in fact, is not known to anybodyelse except that person. In other words, fairness concerns are privateinformation. Therefore, the model presented here takes the next step andtreats fairness concerns as private information of players. Given theresulting information asymmetry, it is not surprising that coordination of adyadic channel with a contract is, in general, no longer possible. At the same time,is possible to coordinate a channel with just a wholesale pricecontract in case the retailer is sufficiently averse to making higher profitthan the supplier. However, we show that when the contract choice is endogenous, the supplier willnot choose a wholesale price contract but, instead, a profit-maximizingcontract that does not coordinate. The results of the experiment that teststhe model's predictions, as well as some underlying assumptions and competingtheories, provide strong support for the theory and show that fairnessorganizes the data very well.Chapter "Competition and contracting in supply chains" presents a simple and, in many respects, robust coordinationmechanism. Its performance approaches first-best asymptotically in a settingwith one supplier and multiple retailers. By introducing horizontal (Bertrand)competition among the retailers the supplier not only induces retailers tomake first-best decisions, but also does it by means of the simplest possiblelinear pricing scheme. Competition does the entire coordinating job, whereas awholesale price contract suffices to extract all profit of thecompeting retailers. Although Bertrandcompetition is not a new concept, little has been known about itsactual performance in the contacting context. It turns out that a competition-basedmechanism is not only extremely simple, but it is also robust to severalrelaxations of the standard assumptions, any of which is enoughdestroy a coordinating contract. First, it survives certain types ofinformation asymmetry. In the extreme example ofprivate information used in this chapter, the mechanism coordinates the channeleven if the supplier is not aware of the very fact of private information.Second, Chapter "Fairness and coordination failures in supply chain contracts" shows how fairness concerns generally make coordination of adyadic channel impossible. However, for the competition-based mechanismfairness concerns is not an obstacle. Turning to the methodological aspects,we would like to note that the mainstream literaturesuggests coordinating contracts resulting from models that assume thesupplier's ability to make a "take-it-or-leave-it" offer. Credibility of such models hasbeen long debated in the literature. Critics insist that the "take-it-or-leave-it" offer is either not a credible threat in thebilateral monopoly or it is a shortcut, implicitly implying perfect competition on the retailers' side.Allowing for competition explicitly not only avoids this criticism but also brings fuller insights, non-available otherwise.
