Dual Sourcing in Repeated Procurement Competitions

Dorothy E. Klotz and Kalyan Chatterjee
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Dorothy E. Klotz: Graduate School of Business Administration, Fordham University, 113 West 60th Street, New York, New York 10023
Kalyan Chatterjee: Smeal College of Business Administration, The Pennsylvania State University, 309 Beam Business Administration Building, University Park, Pennsylvania 16802

Management Science, 1995, vol. 41, issue 8, 1317-1327

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. We find that in a two-period model with production learning and entry costs, dual sourcing, even for the specific mechanism we 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.

Keywords: procurement; dual sourcing; bidding; learning; borrowing; game theory (search for similar items in EconPapers)
Date: 1995
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