GOALI: Retail and Direct Internet Channels: Incentives, Contracts and Behaviors

Stanford University, Stanford CA

Investigators

Abstract

This grant provides funding to optimize the organization of a decentralized manufacturer-retailer system with physical retailers and Internet web-based stores by developing structured agreements (contracts) and prescribing effective management practices. Game theory based modeling will be used to understand the principles required to managing such systems. Human subjects based economics experiments, in which subjects are paid according to how well they play the roles of manufacturers and retailers, will be used to determine how well the principles uncovered by theoretical modeling hold with real human decision makers. In addition, contracts suggested by theory as efficient will be tested with economics experiments to verify their validity. The research will allow for the design of practices that will coordinate decisions and align incentives in fragmented supply chains. Software developed for supply chain experimentation will be adapted as a teaching tool. This project aims to create benefits in three areas: business, science and education. The primary goal is to discover better sales management practices, such as contracts that help coordinate decisions to eliminate inefficiencies. When and if implemented, the manufacturer-retail systems will distribute goods to a wider consumer base with lower costs through better alignment of incentives, more efficient use of information and reduction in inventory. The methodology, a combination of game theory based analytical modeling and economics experiments will also provide a new approach to analyze supply chain contracting issues. In particular, the theory and human strategic behavior will be bridged by this hybrid approach. The software developed for experiments will be re-used to study related follow-on research. Finally, providing students and managers with hands-on, role-play experience through economics experiments will enhance teaching of supply and channel management.