Procurement for Assembly Under Asymmetric Information: Theory and Evidence

48 Pages Posted: 17 Dec 2018 Last revised: 29 Apr 2020

See all articles by Andrew M. Davis

Andrew M. Davis

Cornell University - Samuel Curtis Johnson Graduate School of Management

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management

Kyle B. Hyndman

University of Texas at Dallas

Anyan Qi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: April 28, 2020

Abstract

We investigate an original equipment manufacturer (OEM) purchasing two inputs for assembly from two suppliers with private cost information. The OEM has the ability to contract with the two suppliers either simultaneously or sequentially. Depending on whether the OEM has relatively equal or considerably more bargaining power over the suppliers, the OEM may engage the suppliers in back-and-forth negotiations (the dynamic bargaining institution) or make ultimatum offers (the mechanism design institution). We first theoretically analyze this setting. For the dynamic bargaining institution, we show that in sequential bargaining, the supply chain profit is higher, the OEM earns a lower profit, the first supplier earns a higher profit, and the second supplier may earn a higher or lower profit, than compared to simultaneous bargaining. For the mechanism design institution, we show that all players' profits are the same in simultaneous and sequential contracting. We also benchmark our results against a case where the OEM procures both inputs from a single integrated supplier (a dyadic supply chain) to understand the impact of the assembly structure. We then test these results in a controlled human-subjects experiment. The results support most normative predictions qualitatively, with some deviations: (1) payoff differences across roles are more equal than predicted; (2) dyadic supply chains are more efficient and more likely to reach an agreement than assembly systems; (3) under sequential contracting, the second supplier earns a lower profit; and (4) when the OEM has considerable bargaining power, she prefers to contract sequentially.

Keywords: procurement; asymmetric information; behavioral operations; contracting

JEL Classification: C7; C91; D82

Suggested Citation

Davis, Andrew M. and Hu, Bin and Hyndman, Kyle B. and Qi, Anyan, Procurement for Assembly Under Asymmetric Information: Theory and Evidence (April 28, 2020). Available at SSRN: https://ssrn.com/abstract=3292622 or http://dx.doi.org/10.2139/ssrn.3292622

Andrew M. Davis

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Kyle B. Hyndman

University of Texas at Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Anyan Qi (Contact Author)

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

P.O. Box 830688
Richardson, TX 75083-0688
United States

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