Revenue sharing bids of a loss-averse supplier for a new product development contract: a multi-method investigation
International Journal of Operations & Production Management
ISSN: 0144-3577
Article publication date: 24 August 2022
Issue publication date: 10 November 2022
Abstract
Purpose
When developing a new product, a buying firm solicits revenue sharing bids from two competing suppliers. Bidding behaviors of suppliers do not always align with predictions from rational agent models due to task uncertainty and bounded rationality, which could result in non-optimal supplier offers and ultimately hurt buying firm interests. This paper aims to discuss the aforementioned issues.
Design/methodology/approach
The authors built an analytical model that considers the impact of supplier technological risk, buyer–supplier coordination cost and supplier loss aversion on the optimal bid of the supplier. Next, using limited information processing capacity as a theoretic lens, the authors explore antecedents to the size of a focal supplier's bidding error, the absolute difference between the actual bid and the optimal bid. The authors used quantitative lab experimental data to test the hypotheses.
Findings
(1) Bounded rational bidders often fail to differentiate between relevant and irrelevant competitive information when placing bids, (2) loss aversion of a bidder significantly affects not only levels of bids, particularly for bidders with competitive disadvantages, but also sizes of the bidding error and (3) competitive information that has clearer performance implications are more influential in reducing sizes of bidding errors.
Originality/value
The results provide a comprehensive view of the bidding behaviors of a bounded rational supplier in an innovation outsourcing context with competition. With the results, managers now have a better understanding of behavioral influencers behind non-optimal supplier bids in an innovation outsourcing context.
Keywords
Acknowledgements
All authors contributed equally to the paper.
The author wishes to acknowledge the support from (1) Social Science Humanities Research Council, Insight Grants; Number 435-2022-0271, (2) Social Science Humanities Research Council, Insight Development Grants; Number 435-2022-0271, (3) National Natural Science Foundation of China; Number 71872155 and (4) Key Program for National Social Science Foundation of China; Number 21AZD117.
Citation
Ribbink, D., Pun, H. and Yan, T. (2022), "Revenue sharing bids of a loss-averse supplier for a new product development contract: a multi-method investigation", International Journal of Operations & Production Management, Vol. 42 No. 12, pp. 1853-1877. https://doi.org/10.1108/IJOPM-01-2022-0006
Publisher
:Emerald Publishing Limited
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