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On the trade-off between supplier diversity and cost-effective procurement

Author

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  • Alcalde, José
  • Dahm, Matthias

Abstract

The COVID-19 pandemic has highlighted the need to rely on a diverse pool of suppliers, besides achieving cost effectiveness. Common wisdom, however, holds that these two aims are in conflict. We explore a model of dual sourcing and propose complementing a share auction with affirmative action to create an endogenous set-aside for a high-cost supplier. In our model more intensive affirmative action strengthens the targeted provider. This has the potential to level the playing field, inducing more competitive procurement overall. Our main result provides a condition under which the endogenous set-aside not only guarantees a very substantial share for the high-cost supplier, but also reduces the buyer's provision cost compared to a standard auction. We also illustrate how our approach can help reducing the severity and likelihood of health product shortages, such as those occurred during the COVID-19 outbreak.

Suggested Citation

  • Alcalde, José & Dahm, Matthias, 2024. "On the trade-off between supplier diversity and cost-effective procurement," Journal of Economic Behavior & Organization, Elsevier, vol. 217(C), pages 63-90.
    • Handle: RePEc:eee:jeborg:v:217:y:2024:i:c:p:63-90
    DOI: 10.1016/j.jebo.2023.10.038
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    More about this item

    Keywords

    Affirmative action; Set-asides; Dual sourcing; Supply chains; Procurement;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination

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