Yanchong Zheng

Trust in Forecast Information Sharing

This paper investigates the capacity investment decision of a supplier who solicits private forecast information from a manufacturer. To ensure abundant supply, the manufacturer has an incentive to inflate her forecast in a costless, nonbinding, and nonverifiable type of communication known as “cheap talk.” According to standard game theory, parties do not cooperate and the only equilibrium is uninformative---the manufacturers report is independent of her forecast and the supplier does not use the report to determine capacity. However, we observe in controlled laboratory experiments that parties cooperate even in the absence of reputation-building mechanisms and complex contracts. We argue that the underlying reason for cooperation is trust and trustworthiness. The extant literature on forecast sharing and supply chain coordination implicitly assumes that supply chain members either absolutely trust each other and cooperate when sharing forecast information, or do not trust each other at all. Contrary to this all-or-nothing view, we determine that a continuum exists between these two extremes. In addition, we determine (i) when trust is important in forecast information sharing, (ii) how trust is affected by changes in the supply chain environment, and (iii) how trust affects related operational decisions. To explain and better understand the observed behavioral regularities, we also develop an analytical model of trust to incorporate both pecuniary and nonpecuniary incentives in the game-theoretic analysis of cheap-talk forecast communication. The model identifies and quantifies how trust and trustworthiness induce effective cheap-talk forecast sharing under the wholesale price contract. We also determine the impact of repeated interactions and information feedback on trust and cooperation in forecast sharing. We conclude with a discussion on the implications of our results for developing effective forecast management policies. This paper was accepted by Ananth Iyer, operations and supply chain management.

Markdown or Everyday-Low-Price? The Role of Behavioral Motives

We study a seller’s optimal pricing and inventory strategies when behavioral (nonpecuniary) motives affect consumers’ purchase decisions. In particular, the seller chooses between two pricing strategies, markdown or everyday low price, and determines the optimal prices and inventory level. Two salient behavioral motives that impact consumers’ purchase decisions and the seller’s optimal strategies are anticipated regret and misperception of product availability. Regret arises when a consumer initially chooses to wait but encounters stockout later, or when the consumer buys the product at the high price but realizes that the product is still available at the markdown price. In addition, consumers often perceive the product’s future availability to be different than its actual availability. We determine and quantify that both regret and availability misperception have significant operational and profit implications for the seller. For example, ignoring these behavioral factors can result in up to 10% profit ...

Establishing Trust and Trustworthiness for Supply Chain Information Sharing

In this chapter, we discuss when, how, and why trust and trustworthiness arise to support credible information sharing and cooperation in a supply chain. Synthesizing our learning, we identify the four building blocks of trust and trustworthiness as personal values and norms, market environment, business infrastructure, and business process design. We elaborate on these building blocks and offer tangible insights into how to establish more trusting and cooperative supply chain relationships.

Assessing Consumers’ Valuations of Socially Responsible Products with Controlled Experiments

This chapter discusses the use of controlled experiments to study consumers’ valuations of socially responsible products. We review three common experimental methodologies: conjoint analysis, controlled laboratory experiments, and controlled field experiments. We contrast these methods with examples and highlight the strengths of each method. Despite the large literature on consumers’ valuations of social responsibility, few studies link consumers’ valuations with a company’s supply chain strategy. We present a recent study that fills this gap by utilizing a controlled laboratory experiment to investigate how the level of supply chain transparency may influence consumers’ valuations of a company’s social responsibility practices. We conclude by discussing a few interesting topics for future studies.

Supply Chain Visibility and Social Responsibility: Investigating Consumers' Behaviors and Motives

We design an incentivized human-subject experiment to study the impact of supply chain transparency on consumers’ valuations of a firm’s social responsibility practices. Lower transparency is modeled by higher uncertainty in the compensation that a worker receives for making a product. To deepen our understanding of consumers’ decision-making, we investigate how much of consumers’ valuations can be attributed to indirect reciprocity (i.e., consumers rewarding a firm for the responsible treatment of its workers). We also analyze how heterogeneity in consumers’ prosocial orientation (i.e., willingness to sacrifice one’s own benefit to improve the payoff of a person one directly interacts with) impacts the roles of transparency and indirect reciprocity in consumers’ valuations. Our results demonstrate that consumers are willing to pay a higher price under a higher level of transparency. In addition, there exists an important interplay among transparency, indirect reciprocity, and consumers’ prosocial orientation. High prosocial consumers do not exhibit indirect reciprocity. Their valuations are primarily driven by the social outcome (i.e., the worker’s pay) rather than by the knowledge about the firm’s effort. In sharp contrast, indirect reciprocity has a strong positive effect on low prosocial consumers’ valuations when transparency is high. However, as transparency decreases, we first observe a negative effect of indirect reciprocity on low prosocial consumers’ valuations, and then indirect reciprocity disappears. Our results provide insights into the benefits that a company can derive from increased transparency and how a company can better communicate its social responsibility practices to consumers.

Trust and Trustworthiness

In this chapter, we discuss when, how, and why trust and trustworthiness arise to support cooperation within and across organizations. To do so, we first define trust and trustworthiness, discuss how they can be quantified and determine key components of trusting and trustworthy behavior. In addition, we identify building blocks of trust and trustworthiness and offer tangible insights about how to establish trusting and cooperative business/inter-organizational relationships, based on both academic research and case studies from across industries.