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Controlling for supplier switching in the presence of real options and asymmetric information

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  • Löffler, Clemens
  • Pfeiffer, Thomas
  • Schneider, Georg

Abstract

Applying a real option approach, this paper examines how asymmetric information alters key variables of a firm’s supplier switching process, such as the timing of contracting (hurried versus delayed contracting), transfer payments, set-up, switching, and abandonment decisions. In a symmetric information setting, delayed contracting is unambiguously beneficial. Abandoning the once established relation with the entrant supplier is never an issue. In contrast, under asymmetric information hurried contracting with potentially abandoning the relation can be beneficial. Consistent with adverse selection models, we find that under delayed contracting, in equilibrium, the firm switches less frequently to the entrant supplier (switching inertia). Surprisingly, we also find that under hurried contracting the firm switches more frequently to the entrant supplier (switching acceleration) and may abandon the relation. Finally, we study how these key variables of the supplier switching process change when also the incumbent supplier has private information (two-sided asymmetric information case).

Suggested Citation

  • Löffler, Clemens & Pfeiffer, Thomas & Schneider, Georg, 2012. "Controlling for supplier switching in the presence of real options and asymmetric information," European Journal of Operational Research, Elsevier, vol. 223(3), pages 690-700.
  • Handle: RePEc:eee:ejores:v:223:y:2012:i:3:p:690-700
    DOI: 10.1016/j.ejor.2012.07.018
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    Cited by:

    1. repec:eee:ejores:v:267:y:2018:i:1:p:236-249 is not listed on IDEAS
    2. Zhang, Jianxiong & Tang, Wansheng & Hu, Mingmao, 2015. "Optimal supplier switching with volume-dependent switching costs," International Journal of Production Economics, Elsevier, vol. 161(C), pages 96-104.
    3. Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
    4. repec:eee:ejores:v:267:y:2018:i:1:p:368-380 is not listed on IDEAS

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