Instructions - Page 1 of 4
Rounds
The experiment consists of
16 rounds
.
Buyer and Supplier
This experiment is for two players, called the
Buyer
and the
Supplier
, who represent two companies engaged in an ongoing business relationship.
The
Buyer
has an opportunity to
make an investment
that will save him/her
£1,500
in the long term. The investment costs the Buyer
£500
and is only useful in conjunction with the one Supplier. So the
Buyer
is potentially
£1,000 better off
by deciding to invest,
provided
that he/she continues the business relationship with the Supplier.
The
Supplier
does not benefit directly from the Buyer's investment. The Supplier does, however, have an opportunity to
raise his/her price by £750
, knowing that the Buyer has made a net saving of £1,000 and can therefore afford to pay more. So the
Supplier
is potentially
£750 better off
and the
Buyer
potentially
£1,000 - £750 = £250 better off
,
provided
that the Buyer decides to keep the same supplier.
The
Buyer
may instead decide to
change suppliers
, in which case the
Buyer
ends up
£500 worse off
due to the wasted investment and the
Supplier
ends up
£1,000 worse off
due to the loss of business from the Buyer.
Table of Payoffs
The following table summarises the
payoffs
to both Buyer and Supplier.
Table of Payoffs
Buyer's potential saving is
£1,500
.
Buyer's investment costs him/her
£500
.
Supplier can raise price by
£750
.
Buyer's First Decision
Supplier's Decision
Buyer's Second Decision
Buyer's Payoff
Supplier's Payoff
Do Not Invest
(none)
(none)
£0
£0
Invest
Keep Price
(none)
£1,000
£0
Invest
Raise Price
Keep Supplier
£250
£750
Invest
Raise Price
Change Supplier
£−500
£−1,000