The Complementary Impacts of e-Markets on Existing Supplier-Buyer Relationships in a Supply Chain

Mu Xia and Nan Xia
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Mu Xia: U of Illinois at Urbana-Champaign
Nan Xia: U of Southern California, Los Angeles

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: E-markets have been established in many industries as a sourcing option for buyers, yet in many situations they are used to complement long-term supplier-buyer relationships rather than replacing them. In this paper, we analyze the complementary role of e-markets when the buyer uses e-markets as an outside option in bargaining with the traditional supplier. The supplier may choose to make a relationship-specific investment to reduce the production cost. Two scenarios are considered: when the quality of e-market offering is the same as the traditional suppliers and when there is e-market quality uncertainty. We find that under a wide range of conditions, the e-market helps to stimulate the suppliers investment and improve the coordination of the existing supply chain. Therefore, the e-market can complement rather than substitute the traditional relationship-based supply chain. In addition, our result shows that while the buyer always benefits from the e-market option even if the search cost in the e-market is taken into account, the supplier is worse off. When there is quality uncertainty in the e-market offering, two effects of quality uncertainty on e-market adoption are identified, along with the implications for e-market providers who wish to improve e-market adoptions. While better quality on average will increase e-market adoption, it is surprising that increasing quality dispersion of e-market will also help.

Date: 2006
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