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

Posted: 15 Oct 2019

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

Daniel Corsten

FundaciĆ³n Instituto de Empresa, S.L.

Date Written: October 4, 2019

Abstract

This paper studies a dynamic procurement and production process used by many 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 cars 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.) We derive an optimal production policy and determine the equilibrium procurement contract, which depends on the price elasticity of consumer demand, input cost volatility, and the supplier's R&D and tooling costs. Our most important result is the equilibrium procurement contract under information asymmetry. We conclude by assessing the empirical support for our predictions using a unique data set of contractual arrangements provided to us by BMW. To the best of our knowledge, this is the first paper to provide empirical evidence for such theories in practice.

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

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 ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Daniel Corsten

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

Serrano 99
Madrid, 28006
Spain

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