Procurement for Assembly Under Asymmetric Information: Theory and Evidence
48 Pages Posted: 17 Dec 2018 Last revised: 29 Apr 2020
Date Written: April 28, 2020
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: Suggested Citation