The upstream innovation with an overconfident manufacturer in a supply chain

Overconfidence is a common, pervasive cognitive bias that is of great practical importance in decision-making and widely recognized as an influential factor to consider in operations management. In this paper, we consider overconfidence bias in a supply chain innovation scenario, which consists of an innovative upstream supplier and an overconfident downstream manufacturer overestimating the impact of innovation to enhance demand. We investigate the influence of the manufacturer’s overconfidence on supplier innovation and supply chain profits under the wholesale price contract and the cost-sharing contract settings. Our results suggest that while the overconfidence is detrimental to the supplier’s innovation under a wholesale price contract, it is beneficial to the supplier’s innovation under a cost-sharing contract, and even more beneficial than in the centralized case. We also find that, under a wholesale price contract the manufacturer’s profit can be higher than under a cost-sharing contract when the level of overconfidence exceeds a certain threshold. Interestingly, we further find that the supplier’s unawareness of overconfidence benefits both biased supply chain members under a wholesale price contract but shows the opposite effect for a cost-sharing contract. Our results offer insights into overconfidence bias in operations management and provide practical decision-making advice for supply chain members.