Article ID: | iaor20133845 |
Volume: | 59 |
Issue: | 6 |
Start Page Number: | 1389 |
End Page Number: | 1406 |
Publication Date: | Jun 2013 |
Journal: | Management Science |
Authors: | Li Cuihong |
Keywords: | pricing |
We study a buyer's sourcing strategy along two dimensions: the supply base design and the pricing mechanism, considering supplier competition and cost‐reduction effort. The supply base design concerns the number of suppliers (one or two) included in the supply base and the capacity to be invested in each supplier. The pricing mechanism determines the timing of the price decisions, with the buyer making price commitments before suppliers exert cost‐reduction efforts that may be renegotiated afterward. We find that symmetric capacity investment in suppliers and low price commitments (more likely to be renegotiated) are effective at fostering supplier competition, whereas asymmetric investment and high price commitments (less likely to be renegotiated) are better at motivating supplier effort. A