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Supplier Behavior in Capacity Investment Competition: An Experimental Study

Author

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  • Shanshan Hu
  • Zhixi Wan
  • Qing Ye
  • Wei Chi

Abstract

Many manufacturers ensure supply capacity by using more than one supplier and sharing their capacity investment costs via supplier development programs. Their suppliers face competitive pressure from peers despite the reduced capacity investment cost. Although standard game theory makes clear prediction that cost sharing increases the suppliers' capacity choice and supply chain profit, the complex decision environment of capacity competition makes it interesting to test whether the theory predictions are robust and, if not, whether systematic deviations occur. We present a laboratory experiment study. The experiment data show that supplier subjects invested in higher capacities than what our theoretical analysis predicted, resulting in profit loss for the supply chain. Our econometric analysis indicates that the subjects are bounded rational and their concern for relative standing may be the potential driver of capacity over‐investment. Based on the experimental findings, we study a modified cost‐sharing mechanism that adapts to the behavioral biases. Its performance is validated in a second experiment.

Suggested Citation

  • Shanshan Hu & Zhixi Wan & Qing Ye & Wei Chi, 2017. "Supplier Behavior in Capacity Investment Competition: An Experimental Study," Production and Operations Management, Production and Operations Management Society, vol. 26(2), pages 273-291, February.
  • Handle: RePEc:bla:popmgt:v:26:y:2017:i:2:p:273-291
    DOI: 10.1111/poms.12642
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    Citations

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    Cited by:

    1. Rajat Mishra & Randy Napier & Mahmut Yasar, 2019. "Do competitors respond to capacity changes? Evidence from U.S. manufacturers," Operations Management Research, Springer, vol. 12(3), pages 159-172, December.
    2. Liu, Zugang & Wang, Jia, 2019. "Supply chain network equilibrium with strategic supplier investment: A real options perspective," International Journal of Production Economics, Elsevier, vol. 208(C), pages 184-198.
    3. Xu, Hongyan & Liu, Xiaomin & Huang, He, 2023. "Information sharing and order allocation rule in dual-sourcing," Omega, Elsevier, vol. 114(C).
    4. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    5. Matthew J. Walker & Elena Katok & Jason Shachat, 2023. "Trust and Trustworthiness in Procurement Contracts with Retainage," Management Science, INFORMS, vol. 69(6), pages 3492-3515, June.
    6. Abdullah Dasci & Kemal Guler, 2019. "Dynamic Strategic Procurement from Capacitated Suppliers," Production and Operations Management, Production and Operations Management Society, vol. 28(4), pages 990-1009, April.
    7. Mohsen Ahmadian & Ehsan Elahi & Roger Blake, 2022. "The Behavioral Effects of Competition Intensity and Cost Structure on Competing Suppliers: An Experimental Study in the Context of the USA," International Journal of Global Business and Competitiveness, Springer, vol. 17(2), pages 117-129, December.
    8. Yan, Nina & Liu, Yang & Chen, Jing, 2022. "Competitors or frenemies? Strategic investment between competing channels," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    9. Chen, Xu & Peng, Ying & Wang, Xiaojun & Wang, Pengfei, 2024. "Capacity sharing between competing manufacturers: A collective good or a detrimental effect?," International Journal of Production Economics, Elsevier, vol. 268(C).

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