Bargaining Chains (Long Version)

88 Pages Posted: 7 Jun 2010  

William S. Lovejoy

University of Michigan, Stephen M. Ross School of Business

Date Written: May 2010

Abstract

We consider a firm that designs a new product and wishes to bring it to market, but does not have ownership or control over all of the resources required to make that happen. The firm must select and contract with one of several possible tier 1 suppliers for necessary inputs, who do the same with their (tier 2) suppliers, etc. This general situation is common in industry. We assume tier-wise negotiations, sole sourcing within each tier, complete local information, and horizontal competition. We develop a bargaining-based solution to the negotiations between two adjacent multi-firm tiers and show its consistency with familiar solution concepts from the theories of bargaining and cooperative games. We then link up multiple bargaining modules to generate chain-wide predictions for efficiency and profitability in supply chains with an arbitrary number of tiers and an arbitrary number of firms per tier. We investigate the implications of the results for investments in process improvements or supplier development.

Keywords: Bargaining, supply chains, management

JEL Classification: C70, C78

Suggested Citation

Lovejoy, William S., Bargaining Chains (Long Version) (May 2010). Ross School of Business Paper No. 1146. Available at SSRN: https://ssrn.com/abstract=1621867 or http://dx.doi.org/10.2139/ssrn.1621867

William S. Lovejoy (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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