Renegotiations in the Presence of Supply Disruptions

Abstract

We study the ability to renegotiate in a supply chain setting with the possibility of supply disruption. Disruptions are a real threat to supply chains, especially as the supply chains become longer and more complex. When buyers and sellers write a purchase contract, specifying every possible contingency related to disruptions may not be realistic. However, the ability to renegotiate once a disruption occurs can help buyers and suppliers find efficient solutions. We conducted a controlled laboratory experiment consisting of three studies, each exploring different conditions regarding relationship length, bargaining power, and communication. Our findings indicate that the ability to renegotiate increases buyer profit and decreases disruption inefficiency in short-term relationships but not in long-term ones. In free bargaining, where bargaining power is equal, the impact of renegotiation is greater than in ultimatum bargaining, where bargaining power is unequal. Additionally, when communication is not allowed in ultimatum bargaining, renegotiation significantly enhances buyer profit and reduces disruption inefficiency. These insights can assist managers in designing and negotiating incomplete contracts in environments prone to supply disruptions. The findings can aid managers in designing and negotiating incomplete contracts in environments with supply disruptions.