Managing Supplier Switching

Joel S. Demski, David Sappington and Pablo Spiller

RAND Journal of Economics, 1987, vol. 18, issue 1, 77-97

Abstract: To examine the potential gains from a second production source, we examine how source switching is optimally structured. The model focuses on a purchaser who manages the acquisition process, an incumbent supplier, and a potential entrant or second supplier. Because the costs of the incumbent and second source are correlated, the entrant's costs provide an informative signal about the incumbent's costs. Judicious use of this information allows the purchaser to limit the incumbent's rents. Because entry also provides an alternative source of production, however, there are important distinctions between the optimal entry policy and the optimal auditing policy. One of our findings is that it may be optimal to replace the incumbent, even when the entrant is known to have higher production costs.

Date: 1987
References: Add references at CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://links.jstor.org/sici?sici=0741-6261%2819872 ... O%3B2-D&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rje:randje:v:18:y:1987:i:spring:p:77-97

Ordering information: This journal article can be ordered from
https://editorialexp ... i-bin/rje_online.cgi

Access Statistics for this article

More articles in RAND Journal of Economics from The RAND Corporation
Bibliographic data for series maintained by ().