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Bargaining power and supply base diversification

Author

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  • WAN, Zhixi
  • Beil, Damian R.

Abstract

In this paper, the authors examine a supply base diversification problem faced by a buyer who periodically holds auctions to award short term supply contracts among a cohort of suppliers (i.e., the supply base). To mitigate significant cost shocks to procurement, the buyer can diversify her supply base by selecting suppliers from different regions. The authors find that the optimal degree of supply base diversification depends on the buyer’s bargaining power, i.e., the buyer’s ability to choose the auction mechanism. At one extreme, when the buyer has full bargaining power and thus can dictatorially implement the optimal mechanism, she prefers to fully diversify. At the other extreme, when the buyer uses a reverse English auction with no reserve price due to her lack of bargaining power, she may consider protecting herself against potential price escalation from cost-advantaged suppliers by using a less diversified supply base. The authors find that in general the more bargaining power the buyer has to control price escalation from cost-advantaged suppliers the more she prefers a diversified supply base. This insight is shown to be robust to correlation between regional costs, asymmetry across regions, and intermediate levels of bargaining power.

Suggested Citation

  • WAN, Zhixi & Beil, Damian R., 2009. "Bargaining power and supply base diversification," HEC Research Papers Series 922, HEC Paris.
  • Handle: RePEc:ebg:heccah:0922
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    File URL: http://www.hec.fr/var/fre/storage/original/application/c0901f7b8b3298ddefbc6d02ece0ab22.pdf
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    Cited by:

    1. Cuihong Li, 2013. "Sourcing for Supplier Effort and Competition: Design of the Supply Base and Pricing Mechanism," Management Science, INFORMS, vol. 59(6), pages 1389-1406, June.

    More about this item

    Keywords

    supply base diversification; supplier; buyer; procurement; bargaining;
    All these keywords.

    JEL classification:

    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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