Allocation of inventory responsibilities in overconfident supply chains

• Overconfidence of supply chain parties influences allocation of inventory responsibilities. • Each party can benefit from a biased belief by the other party, and the manufacturer may even benefit from its unilateral overconfidence. • The presence of overconfident channel parties could weaken the negative effect of double marginalization in certain circumstances to benefit the system. • Channel parties’ overconfidence reduces the Pareto-improvement opportunities for most single or two-wholesale-price contracts. We analyze a supply-chain setting in which a manufacturer sells to a retailer, who in turn sells to a market with uncertain demand. A two-wholesale-price contract governs the relationship between the two parties. Before the selling season begins, the retailer preorders from the manufacturer, who stocks to at least satisfy the preorder. After the actual demand is realized, the retailer can place an at-once order, which is satisfied up to the manufacturer's stock availability. The contract specifies the preorder and at-once order wholesale prices. The retailer's preorder and the manufacturer's stocking level determine that the contract functions in one of three regimes, namely Push, Pull, or partial advance booking (PAB). The retailer undertakes all inventory responsibilities in Push, whereas the manufacturer does so in Pull, and they share inventory responsibilities in PAB. An overconfident party holds a biased belief that the demand is less variable than it actually is. We investigate the influences of overconfidence by either one or both parties on the allocation of inventory responsibilities and profitability. Each party can benefit from a biased belief by the other party, and the manufacturer may even benefit from its unilateral overconfidence. The presence of overconfident channel parties could weaken the negative effect of double marginalization in certain circumstances. Furthermore, channel parties’ overconfidence reduces the Pareto-improvement opportunities for most single or two-wholesale-price contracts, and the manufacturer's overconfidence plays a more prominent role in this reduction. We also compare channel parties’ perceived Pareto-improvement sets with their real Pareto-improvement sets to identify profit improvement opportunities.