Ciclo di seminari dipartimentali a.a. 2018/19

Risk and Fairness in Channel Relationships:
Evidence of Behavioral Inconsistencies

Interviene: Paola Mallucci, Wisconsin School of Business

ABSTRACT

In channel negotiations between suppliers and retailers there is often significant uncertainty that is unevenly
distributed between the two firms. While there is ample evidence in the literature that both risk preferences
and fairness would matter in such contexts, there is a lack of evidence on how subjects’ beliefs and
preferences for risk and fairness interact, leaving open the question of how individuals will attempt to fairly
compensate risk that they or their channel partner face. To address the question, we model a wholesale
pricing decision between a supplier and a retailer who may not be risk neutral and may care for fairness. We
then compare the prediction of the theoretical model with data from two incentive-compatible experiments.
We find that suppliers squeeze retailers more when retailers face risk, even though (1) suppliers are not more
generous when they face risk themselves, and (2) retailers do not accept worse offers under risk. We show
that this behavior is incompatible with preferences for risk and/or fairness in which subjects beliefs about the
other players preferences are consistent with their actual preferences. Using a structural approach, we then
estimate the behavioral parameters and find evidence that suppliers underestimate the risk aversion of
retailers leading to significant deadweight losses in situations where the retailer (vs. the supplier) carries the
risk.