IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v307y2023i3p1161-1176.html
   My bibliography  Save this article

The value of product recall insurance in a price competition with financially constrained suppliers

Author

Listed:
  • Chen, Jing
  • Wei, Hang
  • Xu, Shujun
  • Zheng, Chaonan

Abstract

We study the horizontal benefits of product recall (PR) insurance by considering a Bertrand competition with financially constrained suppliers. In the model, two suppliers produce homogeneous products and a buyer purchases from whoever offers the lowest price. Product’s quality is random and defective products would cause a product recall associated with a random recall cost for the faulty supplier. We find that PR insurance eases the suppliers’ financial constraints by reducing their external financing costs and intensifies the price competition. Interestingly, the more intensified price competition may not lead to lower profits for both suppliers. PR insurance enables the suppliers to use financial constraints more efficiently by charging higher prices and improve their profits. We also reveal how asymmetric financial capacities and production costs affect the role of the PR insurance in the price competition. PR insurance restrains the predation effect caused by the financial advantage. However, when the suppliers’ financial capacities are sufficiently high, PR insurance strengthens the predation effect initiated by the cost advantage. Finally, we conduct a numerical study with exponential and Pareto distributions.

Suggested Citation

  • Chen, Jing & Wei, Hang & Xu, Shujun & Zheng, Chaonan, 2023. "The value of product recall insurance in a price competition with financially constrained suppliers," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1161-1176.
    • Handle: RePEc:eee:ejores:v:307:y:2023:i:3:p:1161-1176
    DOI: 10.1016/j.ejor.2022.10.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0377221722007780
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ejor.2022.10.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mariya Bondareva & Edieal Pinker, 2019. "Dynamic Relational Contracts for Quality Enforcement in Supply Chains," Management Science, INFORMS, vol. 65(3), pages 1305-1321, March.
    2. Dimitris Kostamis & Damian R. Beil & Izak Duenyas, 2009. "Total-Cost Procurement Auctions: Impact of Suppliers' Cost Adjustments on Auction Format Choice," Management Science, INFORMS, vol. 55(12), pages 1985-1999, December.
    3. Reyniers, Diane J. & Tapiero, Charles S., 1995. "Contract design and the control of quality in a conflictual environment," European Journal of Operational Research, Elsevier, vol. 82(2), pages 373-382, April.
    4. Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
    5. Mai, Dung T. & Liu, Tieming & Morris, Michael D.S. & Sun, Shuzhen, 2017. "Quality coordination with extended warranty for store-brand products," European Journal of Operational Research, Elsevier, vol. 256(2), pages 524-532.
    6. Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(1), pages 1-26.
    7. Cuihong Li & Zhixi Wan, 2017. "Supplier Competition and Cost Improvement," Management Science, INFORMS, vol. 63(8), pages 2460-2477, August.
    8. Lingxiu Dong & Brian Tomlin, 2012. "Managing Disruption Risk: The Interplay Between Operations and Insurance," Management Science, INFORMS, vol. 58(10), pages 1898-1915, October.
    9. Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
    10. Evan L. Porteus & Hyoduk Shin & Tunay I. Tunca, 2010. "Feasting on Leftovers: Strategic Use of Shortages in Price Competition Among Differentiated Products," Manufacturing & Service Operations Management, INFORMS, vol. 12(1), pages 140-161, November.
    11. S. Alex Yang & Nitin Bakshi & Christopher J. Chen, 2021. "Trade Credit Insurance: Operational Value and Contract Choice," Management Science, INFORMS, vol. 67(2), pages 875-891, February.
    12. Saif Benjaafar & Ehsan Elahi & Karen L. Donohue, 2007. "Outsourcing via Service Competition," Management Science, INFORMS, vol. 53(2), pages 241-259, February.
    13. Heikki Peura & S. Alex Yang & Guoming Lai, 2017. "Trade Credit in Competition: A Horizontal Benefit," Manufacturing & Service Operations Management, INFORMS, vol. 19(2), pages 263-289, May.
    14. Valentina Di Pasquale & Maria Elena Nenni & Stefano Riemma, 2020. "Order allocation in purchasing management: a review of state-of-the-art studies from a supply chain perspective," International Journal of Production Research, Taylor & Francis Journals, vol. 58(15), pages 4741-4766, July.
    15. Burnecki, Krzysztof & Kukla, Grzegorz & Weron, Rafał, 2000. "Property insurance loss distributions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(1), pages 269-278.
    16. Beth Allen & Martin Hellwig, 1986. "Bertrand-Edgeworth Oligopoly in Large Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 175-204.
    17. Volodymyr Babich & Christopher S. Tang, 2012. "Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms," Manufacturing & Service Operations Management, INFORMS, vol. 14(2), pages 301-314, April.
    18. Hsiao†Hui Lee & Cuihong Li, 2018. "Supplier Quality Management: Investment, Inspection, and Incentives," Production and Operations Management, Production and Operations Management Society, vol. 27(2), pages 304-322, February.
    19. Elahi, Ehsan, 2013. "Outsourcing through competition: What is the best competition parameter?," International Journal of Production Economics, Elsevier, vol. 144(1), pages 370-382.
    20. Gérard P. Cachon & Fuqiang Zhang, 2007. "Obtaining Fast Service in a Queueing System via Performance-Based Allocation of Demand," Management Science, INFORMS, vol. 53(3), pages 408-420, March.
    21. Long He & Ying Rong & Zuo‐Jun Max Shen, 2020. "Product Sourcing and Distribution Strategies under Supply Disruption and Recall Risks," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 9-23, January.
    22. Juan Camilo Serpa & Harish Krishnan, 2017. "The Strategic Role of Business Insurance," Management Science, INFORMS, vol. 63(2), pages 384-404, February.
    23. Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
    24. Cuihong Li, 2020. "Supplier Competition and Cost Reduction with Endogenous Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 996-1010, September.
    25. Chester Chambers & Panos Kouvelis & John Semple, 2006. "Quality-Based Competition, Profitability, and Variable Costs," Management Science, INFORMS, vol. 52(12), pages 1884-1895, December.
    26. Lingxiu Dong & Sammi Yu Tang & Brian Tomlin, 2018. "Production Chain Disruptions: Inventory, Preparedness, and Insurance," Production and Operations Management, Production and Operations Management Society, vol. 27(7), pages 1251-1270, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jing Chen & Hang Wei & Lei Xie, 2022. "Mitigating Product Quality Risk under External Financial Pressure: Inspection, Insurance, and Cash/Collateralized Loan," Production and Operations Management, Production and Operations Management Society, vol. 31(1), pages 304-317, January.
    2. Murat Erkoc & Haresh Gurnani & Saibal Ray & Mingzhu Jin, 2023. "Quality investment, inspection policy, and pricing decisions in a decentralized supply chain," Production and Operations Management, Production and Operations Management Society, vol. 32(1), pages 207-226, January.
    3. Dionisia Tzavara and Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," EUI-RSCAS Working Papers 16, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    4. Yang Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2013. "Quality Assurance Contracts in a Multi-Level Supply Chain," Working Papers 0206mss, College of Business, University of Texas at San Antonio.
    5. Shalpegin, Timofey, 2020. "Collaborative product development: Managing supplier incentives for key component testing," European Journal of Operational Research, Elsevier, vol. 285(2), pages 553-565.
    6. S. Alex Yang & Nitin Bakshi & Christopher J. Chen, 2021. "Trade Credit Insurance: Operational Value and Contract Choice," Management Science, INFORMS, vol. 67(2), pages 875-891, February.
    7. Hsieh, Chung-Chi & Liu, Yu-Te, 2010. "Quality investment and inspection policy in a supplier-manufacturer supply chain," European Journal of Operational Research, Elsevier, vol. 202(3), pages 717-729, May.
    8. Dionisia Tzavara & Adrienne Héritier, 2011. "Quality and Environmental Regulation: Verifying Compliance along the Supply Chain," RSCAS Working Papers 2011/16, European University Institute.
    9. Xiao Huang, 2022. "Financing Disruptive Suppliers: Payment Advance, Timeline, and Discount Rate," Production and Operations Management, Production and Operations Management Society, vol. 31(3), pages 1115-1134, March.
    10. Dai, Bin & Nu, Yu & Xie, Xia & Li, Jianbin, 2021. "Interactions of traceability and reliability optimization in a competitive supply chain with product recall," European Journal of Operational Research, Elsevier, vol. 290(1), pages 116-131.
    11. Heikki Peura & S. Alex Yang & Guoming Lai, 2017. "Trade Credit in Competition: A Horizontal Benefit," Manufacturing & Service Operations Management, INFORMS, vol. 19(2), pages 263-289, May.
    12. Mohsen Ahmadian & Ehsan Elahi & Roger Blake, 2022. "The Behavioral Effects of Competition Intensity and Cost Structure on Competing Suppliers: An Experimental Study in the Context of the USA," International Journal of Global Business and Competitiveness, Springer, vol. 17(2), pages 117-129, December.
    13. Ying‐Ju Chen & Mingcherng Deng, 2013. "Supplier certification and quality investment in supply chains," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(3), pages 175-189, April.
    14. Aust, Gerhard & Bräuer, Ina & Buscher, Udo, 2014. "A note on “Quality investment and inspection policy in a supplier-manufacturer supply chain”," European Journal of Operational Research, Elsevier, vol. 234(3), pages 910-915.
    15. Li Chen & Hau L. Lee, 2017. "Sourcing Under Supplier Responsibility Risk: The Effects of Certification, Audit, and Contingency Payment," Management Science, INFORMS, vol. 63(9), pages 2795-2812, September.
    16. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
    17. Liying Mu & Milind Dawande & Xianjun Geng & Vijay Mookerjee, 2016. "Milking the Quality Test: Improving the Milk Supply Chain Under Competing Collection Intermediaries," Management Science, INFORMS, vol. 62(5), pages 1259-1277, May.
    18. Lauren Xiaoyuan Lu & Jan A. Van Mieghem & R. Canan Savaskan, 2009. "Incentives for Quality Through Endogenous Routing," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 254-273, July.
    19. Hong Wan & Xiaowei Xu & Tian Ni, 2013. "The incentive effect of acceptance sampling plans in a supply chain with endogenous product quality," Naval Research Logistics (NRL), John Wiley & Sons, vol. 60(2), pages 111-124, March.
    20. Qin, Xuwei & Shao, Lusheng & Jiang, Zhong-Zhong, 2020. "Contract design for equipment after-sales service with business interruption insurance," European Journal of Operational Research, Elsevier, vol. 284(1), pages 176-187.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:307:y:2023:i:3:p:1161-1176. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eor .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.