Why Information Technology Hasn't Increased the Optimal Number of Suppliers
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.
References listed on IDEAS
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- Hart, Oliver & Moore, John, 1990.
"Property Rights and the Nature of the Firm,"
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- Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
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- Masahiko Aoki, 2013. "Horizontal vs. Vertical Information Structure of the Firm," Chapters, in: Comparative Institutional Analysis, chapter 5, pages 57-58 Edward Elgar Publishing.
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- 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.
- Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-528, June. Full references (including those not matched with items on IDEAS)
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