Supplier Diversification Under Buyer Risk
Name
SSRN-id3328249.pdf
Description
Accepted version
Size
544.02 KB
Format
Adobe PDF
Checksum (MD5)
14782703d4d37da2c1b5f45ef185d2a4
Author(s)
Chod, Jiri
Trichakis, Nikolaos
Tsoukalas, Gerry
Date Issued
2019
Journal
Management Science
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Version
Author's final manuscript
Abstract
© 2019 INFORMS. When should a firm diversify its supply base? Most extant theories attribute supplier diversification to supplier risk. Herein, we develop a new theory that attributes supplier diversification to buyer risk. When suppliers are subject to the risk of buyer default, buyers may take costly action to signal creditworthiness so as to obtain more favorable terms. But once signaling costs are sunk, buyers sourcing from a single supplier become vulnerable to future holdup. Although ex ante supply base diversification can be effective at alleviating the holdup problem, we show that it comes at the expense of higher up-front signaling costs. We resolve the ensuing trade-off and show that diversification emerges as the preferred strategy in equilibrium. Our theory can help explain sourcing strategies when risk in a trade relationship originates from the sourcing firm, for example, a small-to-medium enterprise or a start-up; a setting that has eluded existing theories so far.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1287/MNSC.2018.3095
