Seminar (Dept. of Management Science and Engineering)

Title: Limited Foresight Reasoning in an Infinite-Horizon Supply Chain Bargaining Game

Speaker: Juan Li (School of Management & Engineering, Nanjing University)

Time: 10:00 (Monday), September 20th, 2023

Venue: Room 706, Mingde Business Building

Language: Chinese/English

ABSTRACT:

This paper proposes a limited foresight-reasoning model to explain the experimental observations in an infinite-horizon supply chain bargaining game in which two supply chain parties, a supplier and a retailer, alternately offer contract proposals and decide whether to accept or reject. The proposed model shows that the hierarchy of level-k reasoning implies a hierarchy of limited foresight and converges to the perfect equilibrium as the reasoning level goes to infinity. To validate this model, we check the explanatory power of our model in an infinite-horizon supply chain bargaining game with discounting. Our experimental results show that when the players’ discount factors are relatively low, the model of lower-level foresight reasoning explains a substantial proportion of observations. That is, the players tend to exhibit a lower foresight reasoning level when their or their opponent’s discount factor is lower. The fairness motivation for equal split also plays a vital role in all treatments. We further propose structural estimation models to evaluate the effects of different motivations. We find that supply chain parties’ contract proposals are influenced by their intention of limited foresight reasoning and the perception of fairness motivation. The relative importance of these two factors is regulated by the magnitudes of and differences between the bargainers’ discount factors. Our experiments and simulations reveal that in treatments wherein the supplier holds a significant advantage over the retailer in terms of the discount factor and being the first mover in the first bargaining round, most suppliers exhibit lower levels of foresight reasoning, and the strategy based on limited foresight reasoning can yield a higher supplier payoff than that predicted by the equal split or perfect equilibrium.

Co-authors: Jun Feng, Yulan Wang