In Defense of Limited Manufacturing Cost Control: Disciplining Acquisition of Private Information by Suppliers

29 Pages Posted: 17 Dec 2018

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business

Ram Ramanan

SUNY at Binghamton - School of Management

Date Written: November 26, 2018

Abstract

When a firm’s input supplier can acquire private information to gain an edge in negotiations, we show that the firm can blunt the supplier’s informational advantage by permitting cost inefficiencies in internal production. Specifically, we establish that a modest increase in the cost of the input(s) a firm makes internally credibly commits it to be more aggressive in negotiations with a supplier for the input(s) it buys. Recognizing its potential information rents will be limited, the supplier, in turn, becomes less aggressive in information acquisition. The paper fully characterizes the equilibrium – the firm’s cost-cutting investments, the supplier’s information acquisition decision, and the terms of trade – to demonstrate that often-maligned internal bloat can be an endogenous facilitator of efficient outsourcing.

Suggested Citation

Arya, Anil and Mittendorf, Brian and Ramanan, Ram, In Defense of Limited Manufacturing Cost Control: Disciplining Acquisition of Private Information by Suppliers (November 26, 2018). Available at SSRN: https://ssrn.com/abstract=3291470 or http://dx.doi.org/10.2139/ssrn.3291470

Anil Arya

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ram Ramanan (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

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