231 / 2024-04-23 16:21:42

Signal Returns Risk with Buyback Contract: An Experimental Study

Returns risk,Behavioral operations management,Signaling game

Manufacturers may fail to fulfill their buyback commitments within the buyback contract, thereby introducing returns risks for retailers. Furthermore, the probabilities of breaching these commitments vary among different manufacturers. While existing literature predominantly focuses on the notion of separate equilibrium, where different manufacturers set distinct prices to signal their reliabilities, our research aims to empirically test whether this separating equilibrium still holds in practice.



Our experimental study comprises two parts. In the first part, we conducted experiment under symmetric information where both retailers and manufacturers are aware of buyback probabilities. The objective of this part is to examine the underlying impact of returns risk on supply chain decision-making. We observe significant mental accounting behavior among manufacturers and probability-weighting behavior among retailers.



In the second part, we focus on the scenario of asymmetric information, where manufacturers possess private information of buyback probabilities while retailers do not. The objective of this part is to test whether manufacturers indeed send signals separately based on their types, as hypothesized, and whether these signals are effectively received by retailers. Contrary to the theoretical prediction of separate equilibrium, we find that separating equilibrium is not favored when manufacturers set their contract prices. This suggests a divergence from traditional models and prompts an exploration of the underlying drivers. We posit the driver behind is mental accounting effect and we seek to uncover novel explanations for results.