Supply Diversification with Isoelastic Demand

Abstract

We study a firm’s sourcing strategy when facing two unreliable suppliers and a price-dependent isoelastic demand. At optimality, the firm always orders at least from the low-cost supplier. The firm also orders from the high-cost supplier if and only if the effective purchase cost from the low-cost supplier is greater than the actual purchase cost from the high-cost supplier. When the firm orders from both suppliers, the total order quantity decreases as the correlation between the suppliers’ capacities increases in the sense of the supermodular order. These results, shown now for more commonly used isoelastic demand, corroborate those obtained earlier for linear demand and thus also testify to their robustness with respect to demand specifications.

Keywords: Supply diversification, Supply uncertainty, Isoelastic demand

JEL Classification: C61, M11, M20