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Managing Supplier Switching

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Author Info

  • Joel S. Demski
  • David E.M. Sappington
  • Pablo T. Spiller

Abstract

To examine the potential gains from a second production source, we examine how source switching is optimally structured. The model focuses on a purchaser who manages the acquisition process, an incumbent supplier, and a potential entrant or second supplier. Because the costs of the incumbent and second source are correlated, the entrant's costs provide an informative signal about the incumbent's costs. Judicious use of this information allows the purchaser to limit the incumbent's rents. Because entry also provides an alternative source of production, however, there are important distinctions between the optimal entry policy and the optimal auditing policy. One of our findings is that it may be optimal to replace the incumbent, even when the entrant is known to have higher production costs.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28198721%2918%3A1%3C77%3AMSS%3E2.0.CO%3B2-D&origin=repec
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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 18 (1987)
Issue (Month): 1 (Spring)
Pages: 77-97

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Handle: RePEc:rje:randje:v:18:y:1987:i:spring:p:77-97

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Cited by:
  1. Klenio Barbosa & Pierre C. Boyer, 2012. "Discrimination in Dynamic Procurement Design with Learning-by-doing," CESifo Working Paper Series 3947, CESifo Group Munich.
  2. Tracy R. Lewis & Huseyin Yildirim, 2002. "Managing Dynamic Competition," American Economic Review, American Economic Association, vol. 92(4), pages 779-797, September.
  3. Mark Armstrong & David Sappington, 2005. "Regulation, Competition and Liberalization," Industrial Organization 0505011, EconWPA, revised 07 Oct 2005.
  4. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
  5. Edward S. Prescott & Robert M. Townsend, 2003. "Mechanism design and assignment models," Working Paper 03-09, Federal Reserve Bank of Richmond.
  6. McGuire, Thomas G. & Riordan, Michael H., 1995. "Incomplete information and optimal market structure public purchases from private providers," Journal of Public Economics, Elsevier, vol. 56(1), pages 125-141, January.
  7. James J. Anton & Dennis A. Yao, 1990. "Measuring the effectiveness of competition in defense procurement: A survey of the empirical literature," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 9(1), pages 60-79.

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