Effects of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components
Round 1
Reviewer 1 Report
The article "Overconfidence and Revenue-Sharing Contracts in Supply Chain Innovation" delves into the complex dynamics of supply chain innovation, examining how overconfidence among supply chain members and revenue-sharing (RS) contracts impact investment in R&D for key components. The research findings offer valuable insights into this intricate relationship.
One of the article's strengths is its comprehensive approach. It considers overconfidence from both upstream suppliers and downstream manufacturers, acknowledging that supply chain members' decisions are influenced by this psychological bias. This dual perspective provides a more realistic portrayal of the challenges and opportunities within supply chain collaboration.
The study's results reveal several interesting outcomes. Notably, it finds that RS contracts can stimulate increased R&D investment in key components, regardless of the bargaining power of either party. This is a significant finding, as it highlights the potential of RS contracts to promote innovation.
Additionally, the article uncovers a joint effect of RS contracts and overconfidence, showing that RS contracts can help compensate for profit losses caused by overconfidence, especially when the supplier's bargaining power is low. This finding has practical implications for supply chain management, as it suggests that RS contracts can mitigate the negative impacts of overconfidence on profits.
However, the article could benefit from a more comprehensive discussion of the potential drawbacks and limitations of RS contracts. For instance, it might explore scenarios in which RS contracts may not be effective or situations where overconfidence could lead to suboptimal outcomes.
Furthermore, a more detailed explanation of the research methodology and data sources used would enhance the article's credibility and replicability. This would enable other researchers and practitioners to better understand and apply the study's insights.
"Overconfidence and Revenue-Sharing Contracts in Supply Chain Innovation" makes a valuable contribution to the field of supply chain management by addressing the role of overconfidence and RS contracts in stimulating R&D investment. While the study is well-structured and insightful, it could further strengthen its impact by providing a more comprehensive analysis of potential limitations and offering greater transparency regarding its research methodology.
Accept with minor corrections.
Author Response
Revision report
“Effect of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components”
Manuscript ID: jrfm-2672054
Response to Reviewer 1
Thank you for the valuable comments that have been a great help to us in improving our manuscript. Following your constructive comments, we have accordingly revised our manuscript. In this response document, we reproduce each of your comments below followed in turn by our responses. For convenience, your comments are set out in bold type.
Comments #1
The article "Overconfidence and Revenue-Sharing Contracts in Supply Chain Innovation" delves into the complex dynamics of supply chain innovation, examining how overconfidence among supply chain members and revenue-sharing (RS) contracts impact investment in R&D for key components. The research findings offer valuable insights into this intricate relationship.
One of the article's strengths is its comprehensive approach. It considers overconfidence from both upstream suppliers and downstream manufacturers, acknowledging that supply chain members' decisions are influenced by this psychological bias. This dual perspective provides a more realistic portrayal of the challenges and opportunities within supply chain collaboration.
The study's results reveal several interesting outcomes. Notably, it finds that RS contracts can stimulate increased R&D investment in key components, regardless of the bargaining power of either party. This is a significant finding, as it highlights the potential of RS contracts to promote innovation.
Additionally, the article uncovers a joint effect of RS contracts and overconfidence, showing that RS contracts can help compensate for profit losses caused by overconfidence, especially when the supplier's bargaining power is low. This finding has practical implications for supply chain management, as it suggests that RS contracts can mitigate the negative impacts of overconfidence on profits.
Response:
Thank you for sharing our interest in the research topic. We are greatly encouraged by your positive comments on the value of our study regarding the relationship between RS contracts/overconfidence and innovation, on the research approach we adopted, on the specific research findings regarding the role played by RS contracts and overconfidence, and on the managerial implications derived from our research findings. We have carefully considered your constructive comments regarding the need to discuss the drawbacks and limitations of RS contracts and to analyse the situations where overconfidence can lead to suboptimal outcomes. We have diligently responded to your suggestions by revising and rewriting the relevant parts of the manuscript to address the issues raised in your comments, as shown in our responses below.
Comments #2
However, the article could benefit from a more comprehensive discussion of the potential drawbacks and limitations of RS contracts. For instance, it might explore scenarios in which RS contracts may not be effective or situations where overconfidence could lead to suboptimal outcomes.
Response:
Thank you for the constructive suggestions. Yes, it makes a good sense to have a discussion of the drawbacks and limitations after presenting the benefits of RS contracts. Following this suggestion, we have added a paragraph to discuss the drawbacks and limitations of RS contracts. The added paragraph is presented in section 4.2 (Page 15, Line 573), and we copied it as below:
“Evidently, a full revenue sharing with the supplier would lead to a peak level of R&D investment and production of key components. However, it is difficult or even impossible for a revenue sharing contract to achieve this optimal point because a full revenue sharing with the supplier will be detrimental to the interests of the manufacturer. More specifically, when the manufacturer's profits under a revenue-sharing contract are less than they would have been with no revenue-sharing contract, the manufacturer will withdraw from the contract, and thus the RS contract cannot be formed at all”.
Thanks also for the suggestion of exploring the situations where overconfidence could lead to suboptimal outcomes. We have added several short passages in the manuscript to discuss the drawbacks of overconfidence.
In line 67, and we copied it as below:
“On the other hand, Plous (1993) indicates that overconfidence in judgement and deci-sion-making can also potentially generate catastrophic results for the firm. For example, cellphone maker OPPO had to shut down its chip design subsidiary Zheku Technology, because OPPO was overconfident in its own R&D capabilities and potential market de-mand, but its own chip manufacturing eventually failed to meet the need for chips for mobile phone production. However, some scholars argue that overconfidence does not necessarily undermine performance of supply chain innovation (Kirshner & Shao, 2019; Li, 2019; Wang & Shin, 2015).”
In line 656, and we copied it as below:
“Combining Propositions 2 and 3, it can be inferred that when overconfidence exists in only one party (model SN or model NM), the value of the increase in the other party's profit from the overconfidence is greater than the value of the damage to one's own profit. There exists an optimal degree of overconfidence ( , ) for both model SN and model NM that maximizes supply chain profit, and once this value is exceeded or is less than this value, the supply chain profit will not be able to reach its peak value, and thus, the supply chain will be non-optimal state.”
In line 689, and we copied it as below:
“Corollary 5(b) and Fig. 4(c)(d) indicate that when both the supplier and the manufacturer are overconfident (model SM), a relatively small degree of overconfidence in both of them, when , or when , , can lead to higher supply chain profitability in the SM model as compared to that in the NN model. The opposite would be detrimental to supply chain profitability.”
In line 697, and we copied it as below:
“For example, as mentioned in the introduction, OPPO was overconfident in its R&D ca-pability and potential market demand, which eventually led to the failure of its R&D in-vestment. But Apple and GM have been successful in appointing overconfident CEOs be-cause their level of overconfidence is less than a critical mass.”
Comments #3
Furthermore, a more detailed explanation of the research methodology and data sources used would enhance the article's credibility and replicability. This would enable other researchers and practitioners to better understand and apply the study's insights.
Response:
Thank you for the important comments regarding the need to provide a more detailed explanation about research methodology. Following the suggestion, we have revised the methodology section along several aspects. First, we have added a short passage at the start of the section to outline the structure of the methodology section. The passage is provided in page 5 (Line 228), and we coped it here as below:
“In this section, we first present the basic assumptions for the game modeling analysis, which is followed by describe the four steps for the sequence of the game. Then, we define and discuss the equations used for decision objectives. Finally, we provide a detailed description of the notations used in the game analysis”.
Second, we have added a passage in Section 3, providing a more detailed description of the method used in the modelling analysis (Line 305). The passage is provided in page 7, and we copied it here as below:
“The supplier and the manufacturer use equations (1)-(2) as decision functions, respectively. Solution of the game modelling is achieved by using the traditional inverse solution method. Procedure for game modelling process is given as: First, from the perspective of the supplier as the leader in the supply chain relationship, we determine the response function q with respect to w and I of the manufacturer as the follower in the supply chain, substitute this response function q in the utility function for the supplier. Then, we achieve the values of wholesale price w and innovation level I for the supplier simultaneously. Finally, based on the decision made by the supplier regarding w and I, the manufacturer determine the sales volume q”. The exact solution procedure is detailed in the proof following Lemma 4.
Thanks also for the comments regarding the need to provide data source for the game modelling of the study. Following the suggestion of adding a description of the data source. We added a short passage to provide a description of source for the numerical parameters for the variables used in our game modelling. The passage has been added in section 4 “Model analysis” on page 10 (Line 406), and we copied the passage as below:
“Referring to the simulation data in the work of Du et al. (2021) and Xiao et al. (2020), the basic parameter values of the numerical experiments are set as follows: , which satisfy the four modeling conditions as well as the basic common-sense conditions, e.g., ,, ,, and so on”.
Comments #4
"Overconfidence and Revenue-Sharing Contracts in Supply Chain Innovation" makes a valuable contribution to the field of supply chain management by addressing the role of overconfidence and RS contracts in stimulating R&D investment. While the study is well-structured and insightful, it could further strengthen its impact by providing a more comprehensive analysis of potential limitations and offering greater transparency regarding its research methodology.
Response:
We are highly appreciative for your encouragement and positive comments on our paper. Your constructive suggestions are a great help in facilitating our revisions in order to improve quality of the paper. As reported earlier, we have responded all your comments and suggestions, and have revised the manuscript by addressing the issues raised in the review comments. We believe that the paper has become stronger after incorporating your suggestions.
Author Response File: 
Author Response.docx
Reviewer 2 Report
Comments and Suggestions for Authors:
The manuscript titled “Effects of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components” tries to make a valuable contribution to i Revenue-sharing contracts increasing. These empirical studies are well-structured and well-written. Before accepting the article, the only one comment should be addressed:
The introduction a well-done presents how the supply chain management works. The listed references and examples give precisely supply chains overview. Moreover, the literature review is excellent presented. The authors mentioned an adapted a game-theoretic approach in constructing a supply chain model (line 97). I suggest authors to make a new paragraph where they are going to present game-theoretical branch features, which are going to be connected with behavioural game theory. It tries to look at the psychological and social aspects of economic behaviour (Colin F. Camerer, Behavioural Game Theory: Experiments in strategic interaction). In addition, the conclusion should be improved with relevant economic behavioural facts.
Best Regards,
Suzana
Author Response
Revision report
“Effect of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components”
Manuscript ID: jrfm-2672054
Response to Reviewer 2
Thank you for the valuable comments that have been a great help to us in improving our manuscript. Following your constructive comments, we have accordingly revised our manuscript. In this response document, we reproduce each of your comments below followed in turn by our responses. For convenience, your comments are set out in bold type.
Comments #1
The manuscript titled “Effects of Revenue-Sharing Contracts and Overconfidence on Innovation for Key Components” tries to make a valuable contribution to Revenue-sharing contracts increasing. These empirical studies are well-structured and well-written. The introduction is well-done in presenting how the supply chain management works. The listed references and examples give precisely supply chains overview. Moreover, the literature review is excellent presented.
Response:
Thank you very much for your great help in providing us with valuable feedback. Your positive comments on our manuscript are highly encouraging. We particularly appreciate that you valued our research efforts in presenting the introduction of the research topic, in conducting an extensive review of literature relevant to our topic, and in structuring and presenting the manuscript.
Comments #2
Before accepting the article, the only one comment should be addressed:
The authors mentioned an adapted a game-theoretic approach in constructing a supply chain model (line 97). I suggest authors to make a new paragraph where they are going to present game-theoretical branch features, which are going to be connected with behavioural game theory. It tries to look at the psychological and social aspects of economic behaviour (Colin F. Camerer, Behavioural Game Theory: Experiments in strategic interaction).
Response:
Thank you for your important suggestion of adding a new paragraph so that we can have a more detailed discussion of behavioral game theory. Thanks also for providing us with the useful reference. We fully agree that adding such a paragraph will be helpful to increase the clarity of the methodological approach we adopted in the study. Following this suggestion, we have added a short paragraph in the introduction section (Page 3) to describe the behavioral game theory/model. The reference by Camerer (2011) is cited in the paragraph. The added paragraph (Line 107) is given as below:
“Behavioural game theory is a branch of behavioral economics that portrays the irrational elements of human beings by changing the assumption of the rational man in traditional game theory. By incorporating psychological elements and learning into game theory, behavioral game theory aims to predict how people actually behave in reality (Camerer, 2011). In this study, we explore how overconfidence of corporate decision-makers affects their decision making by analyzing interactions between a supplier and a manufacturer in terms of revenue sharing in the supply chain setting”.
Camerer, C. F. (2011). Behavioral game theory: Experiments in strategic interaction. Princeton university press.
Comments #3
In addition, the conclusion should be improved with relevant economic behavioural facts.
Best Regards,
Response:
We highly appreciate your concise and important suggestion of strengthening the conclusions by providing relevant behavioral facts. Following this suggestion, we have substantially revised the conclusion section, focusing on the contributions of the study regarding overconfidence as the behavioral pattern and its effect on innovation in a supply chain setting, as well as the managerial implications derived from our research findings. The revised discussion of research contributions is presented in conclusion section on page 21 (Line 778), and we copied the rewritten paragraphs as below:
“Our study contributes to the supply chain literature in four significant aspects. First, overconfidence (or a RS contract) on either side increases the level of R&D inputs into key components. More specifically, the level of R&D inputs into key components increases with the degree of overconfidence on the supplier's share of the revenue sharing. Moreover, our findings suggest that the level of R&D inputs into key components is higher when both parties are overconfident than the case only one of the parties is overconfident.
Second, level of confidence affects distribution of benefits between the two parties of supplier and manufacturer. As shown from the results of all three models — manufacturer-only, supplier-only, and both overconfident — the greater the degree of overconfidence, the greater the loss of profits for the self, but the greater the increase in profits for the other.
Third, RS contracts can stimulate increased input to R&D investment, regardless of the bargaining power of either party. On the other hand, as shown in the results from the bilateral negotiation bargaining model, bargaining power of supply parties can determine revenue sharing proportion between the two parties. If the supplier's bargaining power is low, the supplier receives the highest revenue-sharing proportion when only the supplier is overconfident, while the supplier receives the lowest revenue-sharing proportion when only the manufacturer is overconfident. Moreover, it can be observed that the RS contract has a compensatory effect on the loss of profit due to overconfidence when using a bilateral negotiation bargaining model and the supplier's bargaining power is low.
Fourth, the findings from our study have significant managerial implications for business practices with regard to supply chain relationship and innovation investment. For business managers, our findings suggest that revenue sharing contracts can be used as a useful tool to promote innovation. More importantly, our findings regarding the conjoint effect of RS contracts and overconfidence suggest that RS contracts can help compensate for profit losses caused by overconfidence, especially when the supplier’s bargaining power is low. Thus, an important managerial implication from this finding is that managers can use RS contracts to mitigate negative impacts of overconfidence on profits.”
Author Response File: Author Response.docx
