Dual sourcing in repeated procurement competitions

Dual sourcing in repeated procurement competitions

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Article ID: iaor19961496
Country: United States
Volume: 41
Issue: 8
Start Page Number: 1296
End Page Number: 1327
Publication Date: Aug 1995
Journal: Management Science
Authors: ,
Keywords: supply, government, game theory
Abstract:

The issue of maintaining competition over time in a repeated procurement setting is important for both government and private sector buyers. The U.S. Department of Defense has experimented with splitting production quantities between two or more contractors in an effort to make government business more attractive for the private sector. This paper analyzes the effectiveness of this strategy. The authors find that in a two-period model with production learning and entry costs, dual sourcing, even for the specific mechanism they consider, in some cases, reduces overall expected cost. Moreover, if buyers are unable to commit to long term contracts or suppliers are unable to bid away anticipated gains, the incentives to dual source are often stronger.

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