Procurement for Assembly Under Asymmetric Information: Theory and Evidence

Andrew M. Davis (), Bin Hu (), Kyle Hyndman () and Anyan Qi ()
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Andrew M. Davis: Samuel Curtis Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
Bin Hu: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Kyle Hyndman: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Anyan Qi: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080

Management Science, 2022, vol. 68, issue 4, 2694-2713

Abstract: We study an original equipment manufacturer (OEM) purchasing two inputs for assembly from two suppliers with private cost information. The OEM can contract with the two suppliers either simultaneously or sequentially. We consider both cases in which the OEM has relatively equal bargaining power (the dynamic bargaining institution) or substantial bargaining power (the mechanism design institution). For the dynamic bargaining institution, we show that in sequential bargaining, the supply chain profit is higher, the OEM earns a lower profit, the first supplier earns a higher profit, and the second supplier may earn a higher or lower profit, than compared with simultaneous bargaining. For the mechanism design institution, we show that all players’ profits are the same in simultaneous and sequential contracting. We also benchmark against a case where the OEM procures both inputs from a single integrated supplier (a dyadic supply chain). We then test these predictions in a human-subjects experiment, which supports many of the normative predictions qualitatively with some deviations: an OEM with relatively equal bargaining power weakly prefers to contract with suppliers simultaneously, whereas an OEM with substantial bargaining power prefers to contract with suppliers sequentially. In addition, the OEM’s profit and supply chain efficiency are higher in the dyadic supply chain than the assembly system.

Keywords: procurement; asymmetric information; behavioral operations; contracting (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:4:p:2694-2713

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