United We Stand or Divided We Stand? Strategic Supplier Alliances Under Order Default Risk

Xiao Huang (), Tamer Boyacı (), Mehmet Gümüş (), Saibal Ray () and Dan Zhang ()
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Xiao Huang: John Molson School of Business, Concordia University, Montréal, Québec H3G 1M8, Canada
Tamer Boyacı: ESMT European School of Management and Technology, 10178 Berlin, Germany
Mehmet Gümüş: Desautels Faculty of Management, McGill University, Montréal, Québec H3A 1G5, Canada
Saibal Ray: Desautels Faculty of Management, McGill University, Montréal, Québec H3A 1G5, Canada
Dan Zhang: Leeds School of Business, University of Colorado at Boulder, Boulder, Colorado 80309

Management Science, 2016, vol. 62, issue 5, 1297-1315

Abstract: We study the alliance formation strategy among suppliers in a framework with one downstream firm and n upstream suppliers. Each supplier faces an exogenous random shock that may result in an order default. Each of them also has access to a recourse fund that can mitigate this risk. The suppliers can share the fund resources within an alliance, but they need to equitably allocate the profits of the alliance among the partners. In this context, suppliers need to decide whether to join larger alliances that have better chances of order fulfillment or smaller ones that may grant them higher profit allocations. We first analytically characterize the exact coalition-proof Nash-stable coalition structures that would arise for symmetric complementary or substitutable suppliers. Our analysis reveals that it is the appeal of default risk mitigation, rather than competition reduction, that motivates cooperation. In general, a riskier and/or less fragmented supply base favors larger alliances, whereas substitutable suppliers and customer demands with lower pass-through rates result in smaller ones. We then characterize the stable coalition structures for an asymmetric supplier base. We establish that grand coalition is more stable when the supplier base is more homogeneous in terms of their risk levels, rather than divided among a few highly risky suppliers and other low-risk ones. Going one step further, our investigation of endogenous recourse fund levels for the suppliers demonstrates how financing costs affect suppliers’ investments in risk-reducing resources and, consequently, their coalition formation strategy. Last, we discuss model generalizations and show that, in general, our insights are quite robust. This paper was accepted by Serguei Netessine, operations management.

Keywords: cooperation; competition; supply risk; order default; coalition stability; supplier alliances (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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