Supply Chain Sourcing Under Asymmetric Information

Production and Operations Management, 20(1), pp. 92-115, 2011

24 Pages Posted: 14 Oct 2017 Last revised: 17 May 2018

See all articles by Özalp Özer

Özalp Özer

Jindal School of Management - The University of Texas at Dallas

Gal Raz

University of Virginia - Darden School of Business

Date Written: April 1, 2007

Abstract

We study a supply chain with two suppliers competing over a contract to supply components to a manufacturer. One of the suppliers is a big company for whom the manufacturer’s business constitutes a small part of his business. The other supplier is a small company for whom the manufacturer’s business constitutes a large portion of his business. We analyze the problem from the perspective of the big supplier and address the following questions: What is the optimal contracting strategy that the big supplier should follow? How does the information about the small supplier’s production cost affect the profits and contracting decision? How does the existence of the small supplier affect profits? By studying various information scenarios regarding the small supplier’s and the manufacturer’s production cost, we show, for example, that the big supplier benefits when the small supplier keeps its production cost private. We quantify the value of information for the big supplier and the manufacturer. We also quantify the cost (value) of the alternative-sourcing option for the big supplier (the manufacturer). We determine when an alternative-sourcing option has more impact on profits than information. We conclude with extensions and numerical examples to shed light on how system parameters affect this supply chain.

Keywords: sourcing; supply contracts; cost information; game theory; mechanism design

Suggested Citation

Özer, Özalp and Raz, Gal, Supply Chain Sourcing Under Asymmetric Information (April 1, 2007). Production and Operations Management, 20(1), pp. 92-115, 2011. Available at SSRN: https://ssrn.com/abstract=3052038 or http://dx.doi.org/10.2139/ssrn.3052038

Özalp Özer (Contact Author)

Jindal School of Management - The University of Texas at Dallas ( email )

Jindal School of Management
800 W. Campbell Road
Richardson, TX 75080
United States

Gal Raz

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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