Why Are Minimum Order Quantity Contracts Popular in Practice? A Behavioral Investigation

Ozge Tuncel (), Niyazi Taneri () and Sameer Hasija ()
Additional contact information
Ozge Tuncel: Department of Marketing & Supply Chain Management at School of Business and Economics, 6211 LM Maastricht, Netherlands
Niyazi Taneri: Judge Business School, University of Cambridge, Cambridge CB2 1AG, United Kingdom
Sameer Hasija: INSEAD, 138676 Singapore

Manufacturing & Service Operations Management, 2022, vol. 24, issue 4, 2166-2182

Abstract: Problem definition : In theory, all coordinating contracts are equivalent; however, the minimum order quantity (MOQ) contract is observed to be more popular in practice. We seek to understand whether decision makers as suppliers can perform better with the MOQ contract and, if so, why. We also study whether MOQ is indeed the preferred contract when subjects are allowed to choose among coordinating contracts. Academic/practical relevance : The behavioral operations management literature has established a trade-off between complex coordinating and simple noncoordinating contracts. This paper fills a gap in the literature by studying whether and how the coordinating MOQ contract attenuates this trade-off. Methodology : First, we test whether subjects in the role of suppliers given only a single contract type can optimize its parameters. Second, we introduce treatments where the coordinating contracts subject to demand risk are hedged such that risk is eliminated. Third, we repeat two of the initial sets of treatments with a cognitive load survey and introduce single-variable versions of those treatments to reduce cognitive burden. Fourth, we introduce a novel experimental design where, in each period, subjects choose both the type of contract to offer and the parameters of that contract. Results : We find that (i) subjects perform significantly better with the MOQ contract compared with other coordinating contracts; (ii) this can be attributed to the risk inherent in and cognitive burden induced by those contracts; and (iii) subjects choose the MOQ contract more frequently over theoretically equivalent coordinating contracts. Managerial implications : We show that the trade-off between efficiency and complexity can be mitigated by simpler yet efficient contracts. Hence, there is considerable benefit to identifying contractual mechanisms that ameliorate the adverse effects of complexity. This explains the prevalence of MOQ terms in supply contracts.

Keywords: behavioral operations; minimum order quantity contracts; buyback; revenue sharing (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2021.1061 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:24:y:2022:i:4:p:2166-2182

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().