Strategic Benefit of Request for Proposal/Quotation

Abstract

We study how the procurement process may help a buyer reduce purchasing costs under a dual-sourcing setting. First, we analyze the equilibrium outcomes when the buyer simultaneously or sequentially bilaterally negotiates with the suppliers. We establish coordination results and characterize the buyer's maximum equilibrium profit under such bilateral bargaining settings. Moreover, we show that the buyer can benefit from a request for proposal/quotation (RFx) stage that precedes the negotiation stage when the suppliers are imperfect substitutes. Specifically, by endogenizing the sequence of negotiations via the offers tendered in the RFx stage, the buyer's equilibrium profit with an RFx is (weakly) higher than her maximum equilibrium profit without an RFx. Furthermore, under a complete information setting, the buyer accepts both offers generated in the RFx stage and additional negotiation needs not to be carried out in equilibrium. Our insights extend to a random demand setting, in which the buyer first negotiates contracts with the suppliers and then decides order quantities after demand realization.

Keywords: Bilateral Bargaining, Request for Proposal, Request for Quotation, Sourcing Strategy

JEL Classification: C71, C72, C78