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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Oliver Hart & John Moore, 1988.
"Property Rights and the Nature of the Firm,"
495, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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 511-28, June.
- Erik Brynjolfsson & Thomas W. Malone & Vijay Gurbaxani & Ajit Kambil, 1994.
"Does Information Technology Lead to Smaller Firms?,"
INFORMS, vol. 40(12), pages 1628-1644, December.
- Erik J. Brynjolfsson & Thomas Malone & Vijay Gurbaxani & Ajit Kambil, 1991. "Does Information Technology Lead to Smaller Firms?," Working Paper Series 123, MIT Center for Coordination Science.
- Aoki, Masahiko, 1986. "Horizontal vs. Vertical Information Structure of the Firm," American Economic Review, American Economic Association, vol. 76(5), pages 971-83, December.
When requesting a correction, please mention this item's handle: RePEc:wop:mitccs:135. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.