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http://ssrn.com/abstract=1275110
 
 

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Using a Dual-Sourcing Option in the Presence of Asymmetric Information about Supplier Reliability: Competition vs. Diversification


Zhibin (Ben) Yang


University of Oregon - Charles H. Lundquist School of Business

Goker Aydin


University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Volodymyr Babich


Georgetown University - McDonough School of Business

Damian R. Beil


University of Michigan, Stephen M. Ross School of Business

September 5, 2011

Ross School of Business Working Paper No. 1116

Abstract:     
We study a buyer’s strategic use of a dual-sourcing option when facing suppliers possessing private information about their disruption likelihood. We solve for the buyer’s optimal procurement contract. We show that the optimal contract can be interpreted as the buyer choosing between diversification and competition benefits. Better information increases diversification benefits and decreases competition benefits. Therefore, with better information the buyer is more inclined to diversify. Moreover, better information may increase or decrease the value of the dual-sourcing option, depending on the buyer’s unit revenue: for large revenue, the buyer uses the dual sourcing option for diversification, the benefits of which increase with information; for small revenue, the buyer uses the dual sourcing option for competition, the benefits of which decrease with information. Surprisingly, as the reliability of the entire supply base decreases, the buyer may stop diversifying under asymmetric information (to leverage competition), while it would never do so under symmetric information. Finally, we analyze the effect of codependence between supply disruptions. We find that lower codependence leads the buyer to rely less on competition. Because competition keeps the information costs in check, a reduction in supplier codependence increases the buyer’s value of information. Therefore, strategic actions to reduce codependence between supplier disruptions should not be seen as a substitute for learning about suppliers’ reliabilities.

Number of Pages in PDF File: 37

Keywords: Supply Risk, Mechanism Design, Diversification

JEL Classification: L15, C72, D24, D82

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Date posted: September 29, 2008 ; Last revised: April 3, 2012

Suggested Citation

Yang, Zhibin (Ben) and Aydin, Goker and Babich, Volodymyr and Beil, Damian R., Using a Dual-Sourcing Option in the Presence of Asymmetric Information about Supplier Reliability: Competition vs. Diversification (September 5, 2011). Ross School of Business Working Paper No. 1116. Available at SSRN: http://ssrn.com/abstract=1275110 or http://dx.doi.org/10.2139/ssrn.1275110

Contact Information

Zhibin (Ben) Yang (Contact Author)
University of Oregon - Charles H. Lundquist School of Business ( email )
1208 University of Oregon
Eugene, OR 97403-1208
United States
Goker Aydin
University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )
1205 Beal Avenue
Ann Arbor, MI 48109
United States
Volodymyr Babich
Georgetown University - McDonough School of Business ( email )
37th and O Streets NW
Washington, DC 20005
United States
202-687-4782 (Phone)
HOME PAGE: http://explore.georgetown.edu/people/vob2/
Damian R. Beil
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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