Service-level agreements and supplier capacity decisions: the impact of incentive framing on trust (joint work Wendy van der Valk)
The goal of this project is to study the effect of incentive framing on the development of trust in supply chains and shed light on the underlying mechanism (e.g., violation of expectations, attributions of benevolence and emotions). We focus on the framing of service-level-agreements (bonus versus reward), and study their effect on trust development in the context of demand information sharing between a buyer and a supplier who sets capacity.
Volume guarantees in global health and economies of scale: the effect on current and future prices (joint work with Alexander Rothkopf)
Recently global health procurement organizations grant volume guarantees to pharmaceutical companies for the procurement of donor funded medicines and medical devices (e.g. pentavalent vaccine, contraceptive implants) and have been successful in achieving, among other things, lower prices. One main driver for substantial price reductions associated with volume guarantees are economies of scale. However, awarding one or more manufacturers a longer-term contract may inhibit recurring competition and also disincentivize new manufacturers to enter the market. This paper focuses on how the design of a volume guarantee (its size and split among incumbent suppliers) may affect competition and prices, currently and in the future, when technology is mature and fixed production costs are high. We find that due to economies of scale a) second period bids, a proxy for future prices, do not monotonically increase in the guarantee, b) first round bids, a proxy for current prices, do not necessarily decrease in the guarantee, as one would intuitively expect, and c) there is benefit from splitting the current volume among suppliers. Total procurement cost over both periods, and hence the success of the guarantee, depends heavily on whether or not suppliers behave strategically.