Conservative or free-riding: Optimal sourcing strategy selection

Globalized supply chains have expanded firms’ sourcing options, leading to increasingly diverse procurement strategies. Sourcing from renowned suppliers can generate brand spillover effects that stimulate demand, but such suppliers are often subject to supply disruption risk arising from capacity prioritization or external shocks. In contrast, stable suppliers offer more reliable supply with limited demand enhancement. To balance these considerations, firms may adopt dual sourcing. We develop a game-theoretic model involving a downstream firm, a renowned supplier, and a stable supplier to examine the firm’s optimal sourcing strategy under the trade-off between brand spillovers and disruption risk. Three sourcing modes are examined: sole sourcing from the renowned supplier, sole sourcing from the stable supplier, and dual sourcing. Equilibrium outcomes characterize pricing, sourcing, and profit implications across regimes. Our analysis yields several novel insights. First, upstream competition induced by dual sourcing does not necessarily lead to lower wholesale prices. Second, no sourcing strategy uniformly dominates; the firm’s optimal choice depends on its incentive to leverage brand spillovers and the level of disruption risk. Third, under high disruption risk, a shift from sole sourcing to dual sourcing can align the firm’s incentives with those of the renowned supplier, who may benefit from demand expansion under diversification. These findings contribute to sourcing strategy design in global supply chains facing reputational considerations and supply uncertainty.