Narendra Singh - PhD Candidate from Scheller College of Business, Georgia Institute of Technology would be presenting a Job talk in the Operations Management Area
Research Seminars
Academic Areas Operations Management
Narendra Singh, PhD Candidate , Scheller College of Business, Georgia Institute of Technology
January 2, 2015
| Friday
AC3 Lecture Theatre, Level 2, ISB Campus, Gachibowli, Hyderabad, India, 500 111
Open to Public
Title: Product Quality in Decentralized Supply Chains: Value of Information Asymmetry
Abstract: Original equipment manufacturers (OEMs) often face the dilemma of whether to make an essential component of a product in-house or source it from a supplier with superior capabilities. Though sourcing from the supplier, due to its superior capabilities, could generate greater overall supply-chain profit, the supplier can dictate contract terms and thus leave lower share of the profit for the OEM. In this paper, we investigate implications of relative capabilities of the OEM's in-house option and the supplier on the OEM's choice of product design quality and subsequent contract outcomes. We model the problem as a dynamic game between an OEM with an in-house option and a supplier, who has superior capabilities than the OEM's in-house option in terms of cost structure. The OEM chooses product quality in the design stage, followed by the supplier offering the contract for supplying a critical component used in the product. Thereafter, the OEM either accepts the supplier’s offer or chooses her in-house option, and sells the product in the consumer market.
Contrary to the intuition, we show that the supplier’s ability to offer a two-part tariff contract need not always benefit the supplier. In fact, the two-part tariff contract, compared to a price-only contract, leaves both the OEM and the supplier worse off when cost competitiveness of the OEM's in-house option is sufficiently low. The reason is that the supplier’s ability to offer the two-part tariff contract induces the OEM to choose low product quality, which, in turn, diminishes the total supply-chain profit. We also investigate the impact of information asymmetry regarding the cost structure of the OEM’s in-house option. Counterintuitively, information asymmetry may be desirable not only for the OEM, but also for the supplier. This is because information asymmetry allows the OEM to choose higher product quality, resulting in an increase in not only the overall supply chain profit but also the individual profits of the OEM and the supplier.
Abstract: Original equipment manufacturers (OEMs) often face the dilemma of whether to make an essential component of a product in-house or source it from a supplier with superior capabilities. Though sourcing from the supplier, due to its superior capabilities, could generate greater overall supply-chain profit, the supplier can dictate contract terms and thus leave lower share of the profit for the OEM. In this paper, we investigate implications of relative capabilities of the OEM's in-house option and the supplier on the OEM's choice of product design quality and subsequent contract outcomes. We model the problem as a dynamic game between an OEM with an in-house option and a supplier, who has superior capabilities than the OEM's in-house option in terms of cost structure. The OEM chooses product quality in the design stage, followed by the supplier offering the contract for supplying a critical component used in the product. Thereafter, the OEM either accepts the supplier’s offer or chooses her in-house option, and sells the product in the consumer market.
Contrary to the intuition, we show that the supplier’s ability to offer a two-part tariff contract need not always benefit the supplier. In fact, the two-part tariff contract, compared to a price-only contract, leaves both the OEM and the supplier worse off when cost competitiveness of the OEM's in-house option is sufficiently low. The reason is that the supplier’s ability to offer the two-part tariff contract induces the OEM to choose low product quality, which, in turn, diminishes the total supply-chain profit. We also investigate the impact of information asymmetry regarding the cost structure of the OEM’s in-house option. Counterintuitively, information asymmetry may be desirable not only for the OEM, but also for the supplier. This is because information asymmetry allows the OEM to choose higher product quality, resulting in an increase in not only the overall supply chain profit but also the individual profits of the OEM and the supplier.
