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Using a Dual-Sourcing Option in the Presence of Asymmetric Information about Supplier Reliability: Competition vs.
 

Summary: Using a Dual-Sourcing Option in the Presence of Asymmetric
Information about Supplier Reliability: Competition vs.
Diversification
Zhibin (Ben) Yang
GĻoker Aydin
Volodymyr Babich
Damian R. Beil §
September 5, 2011
Abstract
We study a buyer's strategic use of a dual-sourcing option when facing suppliers possessing
private information about their disruption likelihood. We solve for the buyer's optimal procure-
ment contract. We show that the optimal contract can be interpreted as the buyer choosing
between diversification and competition benefits. Better information increases diversification
benefits and decreases competition benefits. Therefore, with better information the buyer is
more inclined to diversify. Moreover, better information may increase or decrease the value of
the dual-sourcing option, depending on the buyer's unit revenue: for large revenue, the buyer
uses the dual sourcing option for diversification, the benefits of which increase with information;
for small revenue, the buyer uses the dual sourcing option for competition, the benefits of which
decrease with information. Surprisingly, as the reliability of the entire supply base decreases, the
buyer may stop diversifying under asymmetric information (to leverage competition), while it

  

Source: Aydin, Goker - Department of Operations and Decision Technologies, Indiana University Bloomington

 

Collections: Engineering