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Why Information Technology Hasn't Increased the Optimal Number of Suppliers

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Author Info
J. Yannis Bakos
Erik Brynjolfsson

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Abstract

Information technology has generally reduced search and coordination costs. Ceteris paribus, this should lead firms to increase the number of suppliers with which they do business. However, there is little evidence of an increase in the number of suppliers used in the past few years. On the contrary, in many industries, leading firms are working with fewer suppliers. This suggests that other forces must be accounted for in a more complete model of buyer-supplier relationships.

This paper presents a model that shows how a buyer can increase its suppliers' incentives to invest in quality by decreasing their number. This makes it more difficult for the buyer to threaten to switch to alternative sources and thereby expropriate the supplier's share of the value created. As a result, suppliers are more willing to make "non-contractible" investments in quality. Thus, we argue that because information technology often increases the importance of quality, it can lead firms to employ fewer suppliers, and that this will be true even when search and coordination costs are very low. Evidence from several empirical studies of buyer-supplier relationships appears to be consistent with this explanation.

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Paper provided by MIT Center for Coordination Science in its series Working Paper Series with number 135.

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Date of creation: Aug 1992
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Handle: RePEc:wop:mitccs:135

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  2. Bakos, J. Yannis. & Brynjolfsson, Erik., 1993. "When quality matters : information technology and buyer-supplier relationships," Working papers 140. Working paper (Sloan, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  3. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June. [Downloadable!] (restricted)
  4. Aoki, Masahiko, 1986. "Horizontal vs. Vertical Information Structure of the Firm," American Economic Review, American Economic Association, vol. 76(5), pages 971-83, December. [Downloadable!] (restricted)
  5. Erik J. Brynjolfsson & Thomas Malone & Vijay Gurbaxani & Ajit Kambil, 1991. "Does Information Technology Lead to Smaller Firms?," Working Paper Series 123, MIT Center for Coordination Science. [Downloadable!]
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  1. Eric K. Clemons & Sashidhar P. Reddi, 1994. "The Impact of I.T. on the Degree of Outsourcing, the Number of Suppliers, and the Duration of Contracts," Center for Financial Institutions Working Papers 95-12, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  2. Bakos, J. Yannis. & Brynjolfsson, Erik., 1993. "When quality matters : information technology and buyer-supplier relationships," Working papers 140. Working paper (Sloan, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
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