Manufacturers' Competition and Subsidies to Suppliers

28 Pages Posted: 28 May 2010  

Adam A. Wadecki

University of Michigan at Ann Arbor

Volodymyr Babich

Georgetown University

Owen Q. Wu

Indiana University - Kelley School of Business

Date Written: 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.

Keywords: Supply Risk, Competition, Shared Supplier, Subsidies

Suggested Citation

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

Adam A. Wadecki

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Volodymyr Babich (Contact Author)

Georgetown University ( email )

37th and O St NW
McDonough School of Business
Washington, DC 20057
United States

HOME PAGE: http://explore.georgetown.edu/people/vob2/

Owen Q. Wu

Indiana University - Kelley School of Business ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

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