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Sourcing under overconfident buyer and suppliers

Tarun Jain, Jishnu Hazra and T.C.E. Cheng

International Journal of Production Economics, 2018, vol. 206, issue C, 93-109

Abstract: In supply chains the buyer and its suppliers are often overconfident in situations where they face demand uncertainties. In this paper we study the impact of such overconfidence bias on the buyer's supply-base design strategy. With overconfidence bias, the buyer and suppliers perceive lower demand variability as compared with reality. Characterizing the buyer's optimal reserved capacity and optimal number of suppliers in the supply base, we find a threshold policy for impact of the buyer's overconfidence bias. We also find that the suppliers' overconfidence bias decreases the buyer's reserved capacity and number of suppliers in the supply base.

Keywords: Overconfidence; Capacity reservation; Bidding; Asymmetric capacity information (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:proeco:v:206:y:2018:i:c:p:93-109