Abstract

http://ssrn.com/abstract=1616949
 
 

References (13)



 
 

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Manufacturers' Competition and Subsidies to Suppliers


Adam A. Wadecki


University of Michigan at Ann Arbor

Volodymyr Babich


Georgetown University - McDonough School of Business

Owen Q. Wu


University of Michigan, Stephen M. Ross School of Business

March 22, 2010


Abstract:     
Frequently, manufacturers experience supply disruptions due to supplier bankruptcies. Manufacturers can increase supplier reliability by providing suppliers subsidies in excess of suppliers' production costs. We examine the optimal subsidy decisions of manufacturers in four supply chain structures. These structures diff er along two dimensions: competition among manufacturers and manufacturers' use of dedicated or shared suppliers. Manufacturer-provided subsidies serve to improve the supplier's financial state. Manufacturers compete with one another in the Cournot sense. We find that competing manufacturers face an important tradeoff . By sharing suppliers, manufacturers enjoy decreased subsidy costs because they reap the benefit of competitor-provided subsidies. On the other hand, by using dedicated suppliers, manufacturers may become monopolists when their competitor's supplier defaults. We find (i) suppliers receive less subsidies when manufacturers compete; (ii) increases in the intensity of competition increases among manufacturers lead to lower subsidies provided to suppliers and decreased supplier reliability; (iii) consumers always prefer manufacturer-level competition; (iv) manufacturer-level subsidy costs are less when manufacturers share suppliers; and, (v) the amount of subsidies received by suppliers (and hence, their reliability) is dependent on the spread between pro ts in a monopoly environment and an oligopoly environment.

Number of Pages in PDF File: 28

Keywords: Supply Risk, Competition, Shared Supplier, Subsidies

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Date posted: May 28, 2010  

Suggested Citation

Wadecki, Adam A. and Babich, Volodymyr and Wu, Owen Q., Manufacturers' Competition and Subsidies to Suppliers (March 22, 2010). Available at SSRN: http://ssrn.com/abstract=1616949 or http://dx.doi.org/10.2139/ssrn.1616949

Contact Information

Adam A. Wadecki
University of Michigan at Ann Arbor ( email )
701 Tappan St. Rm E2600
Ann Arbor, MI 48109
United States
Volodymyr Babich (Contact Author)
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/
Owen Q. Wu
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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