Product Quality Selection: Contractual Agreements and Supplier Competition in an Assemble-to-Order Environment

International Journal of Production Economics 141 (2013) 626-638

Columbia Business School Research Paper No. 16-61

37 Pages Posted: 26 Aug 2016

See all articles by Mehmet Sekip Altug

Mehmet Sekip Altug

George Mason University

Garrett van Ryzin

Cornell Tech; Lyft, Inc.

Date Written: September 25, 2012

Abstract

We consider a multi-supplier, single-manufacturer supply chain where each supplier sells a different component at varying quality levels. The manufacturer has to decide on which quality level to choose for each component, trading-off the total cost and total quality. Each supplier decides on a price per unit quality level for its component. We characterize the strategic interaction among the suppliers and analyze the inefficiencies. We find that the inefficiencies due to such quality competition can be quite significant. We then propose and analyze several mechanisms, such as quality-price schedules and revenue sharing that restore efficiency.

Suggested Citation

Altug, Mehmet Sekip and van Ryzin, Garrett, Product Quality Selection: Contractual Agreements and Supplier Competition in an Assemble-to-Order Environment (September 25, 2012). International Journal of Production Economics 141 (2013) 626-638; Columbia Business School Research Paper No. 16-61. Available at SSRN: https://ssrn.com/abstract=2829671

Mehmet Sekip Altug (Contact Author)

George Mason University ( email )

VA 22030
United States

Garrett Van Ryzin

Cornell Tech ( email )

2 W Loop Rd
New York, NY 10044
United States

Lyft, Inc. ( email )

San Francisco, CA

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