Sharing the Risk: Understanding Risk-Sharing Contracts from the Supplier's Perspective

Karen Donohue, Yinghao Zhang

Research output: Chapter in Book/Report/Conference proceedingChapter

1 Scopus citations

Abstract

Risk-sharing contracts are known to be an effective means for a supplier to increase channel profit by sharing the risk of supplydemand mismatches with their buyer. This chapter describes an activity for introducing two types of risk-sharing contracts, buyback and revenue sharing, exploring when each is more appropriate to use. The activity consists of two exercises where students take on the role of supplier, first choosing which contract to offer, and second setting contract parameters for one of the contract types. In discussing the outcomes, students discover that the profit margin of a product (whether it is high versus low margin) leads to differences in contract preferences and profit levels. This provides an opportunity to introduce two important behavioral factors, loss aversion and prospective accounting, that help explain these contract performance differences.

Original languageEnglish (US)
Title of host publicationThe Handbook of Behavioral Operations Management
Subtitle of host publicationSocial and Psychological Dynamics in Production and Service Settings
PublisherOxford University Press
ISBN (Electronic)9780190239336
ISBN (Print)9780199357215
DOIs
StatePublished - May 21 2015

Keywords

  • Buyback
  • Contract
  • Loss aversion
  • Prospective accounting
  • Revenue sharing

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