Information Asymmetry, Rents, and Cost Risk Allocation: An Investigation of the BMW Supply Chain

50 Pages Posted: 15 Oct 2019 Last revised: 5 Jan 2021

See all articles by Danko Turcic

Danko Turcic

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Panos Markou

University of Virginia - Darden School of Business

Panos Kouvelis

Washington University in St. Louis

Daniel Corsten

FundaciĆ³n Instituto de Empresa, S.L.

Date Written: October 4, 2019

Abstract

This paper studies a dynamic procurement process used by many European automakers and BMW in particular. An automaker (she) must procure components from an upstream supplier (him) to assemble cars in a given production period. Demand for vehicles is stochastic, and retail prices are endogenous. The automaker may or may not be privy to the supplier's raw material product cost, which is also stochastic. In the former case, we say that information is symmetric; in the latter case, information is asymmetric. (Existing work in this area is limited to static models with deterministic demand and symmetric information.) The contracts BMW uses are the material-plus-surcharge (MPS) and the fixed price contract (FP). In that environment, we explain how to choose between the contracts that BMW uses currently, and we identify a new, optimal contract for the asymmetric case that would net the automaker an additional profit boost. We conclude by assessing the empirical support for our predictions using a unique data set of contractual arrangements provided to us by BMW. Our analysis sharpens our understanding of contract choice in dynamic procurement settings and identifies a list of key factors in making such choices.

Keywords: asymmetric information, risk management, commodity, automotive, empirical

Suggested Citation

Turcic, Danko and Markou, Panos and Kouvelis, Panos and Corsten, Daniel, Information Asymmetry, Rents, and Cost Risk Allocation: An Investigation of the BMW Supply Chain (October 4, 2019). Darden Business School Working Paper No. 3464595, Available at SSRN: https://ssrn.com/abstract=3464595 or http://dx.doi.org/10.2139/ssrn.3464595

Danko Turcic (Contact Author)

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Panos Markou

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Panos Kouvelis

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.panoskouvelis.info

Daniel Corsten

FundaciĆ³n Instituto de Empresa, S.L. ( email )

Serrano 99
Madrid, 28006
Spain

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