How does pricing power affect a firm’s sourcing decisions from unreliable suppliers?

Abstract

We study sourcing decisions of price-setting and price-taking firms with two unreliable suppliers, where a price-setting firm sets the retail price after the supply uncertainty is resolved and a price-taking firm takes the retail price as given. We investigate the impacts of market conditions, suppliers’ wholesale prices and their reliabilities on the optimal sourcing decisions of price-setting and price-taking firms, and examine how a firm’s pricing power affects these impacts. We define a supplier’s reliability in terms of the “size” or the “variability” of his random capacity using the concepts of stochastic dominance. We find that the supplier reliability affects the optimal sourcing decisions differently for price-setting and price-taking firms. Specifically, with a price-setting firm, a supplier can win a larger order by increasing his reliability, it is not always so with a price-taking firm.

Keywords:

• pricing power
• supply uncertainty