Procurement for Assembly Under Asymmetric Information: Theory and Evidence

51 Pages Posted: 17 Dec 2018 Last revised: 3 Nov 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: November 2, 2020

Abstract

We study an original equipment manufacturer (OEM) purchasing two inputs for assembly from two suppliers with private cost information. The OEM can contract with the two suppliers either simultaneously or sequentially. We consider both cases in which the OEM has relatively equal bargaining power (the dynamic bargaining institution) or substantial bargaining power (the mechanism design institution). 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 against a case where the OEM procures both inputs from a single integrated supplier (a dyadic supply chain). We then test these predictions in a human-subjects experiment, which support many of the normative predictions qualitatively with some deviations: an OEM with relatively equal bargaining power weakly prefers to contract with suppliers simultaneously while an OEM with substantial bargaining power prefers to contract with suppliers sequentially. In addition, the supply chain efficiency and the OEM's profit are higher in the dyadic supply chain than the assembly system.

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 (November 2, 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
62
Abstract Views
573
rank
393,574
PlumX Metrics