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[Lecture, Oct 17] Sourcing Competition under Cost Uncertainty and Information Asymmetry

time: 2019-10-11

Title: Sourcing Competition under Cost Uncertainty and Information Asymmetry

Speaker: Prof. WU Xiaole, Department of Management Science, School of Management, Fudan University

Time: 10:00 am, October 17, 2019

Venue: Room 214, Building37, Wushan Campus


Introduction to the speaker:

Dr. WU Xiaole is Professor and doctoral supervisor with the Department of Management Science at the School of Management of Fudan University. She received her bachelor’s degree in Industrial Engineering from Tsinghua University in 2006, and Ph.D. degree in Management from Washington University in St. Louis, USA in 2011. Her research fields include Supply Chain Management, Risk Management, and Sustainable Operations. Her research work has been published by journals such as Management Science, MSOM, POM, etc. Prof. Wu also serves as Senior Editor for POM and Associate Editor for Service Science and Modern Supply Chain Research and Applications.


Abstract:

Driven by increasing costs in the traditionally-regarded low-cost manufacturing bases (e.g., China), many firms have started to outsource their production to the regions of even lower costs (e.g., Southeast Asia). However, a new environment may involve higher cost uncertainty and severer information asymmetry. Motivated by these observations, we consider a sourcing game where competing firms choose between a supplier with transparent certain cost (type-C supplier) and a supplier with potentially lower but less transparent, uncertain cost (type-U supplier). We characterize the equilibrium of the sourcing game and study how different parameters affect the firms' sourcing strategy and profit performance. First, we find that due to information asymmetry, a large market size can make firms prefer the C-supplier to the U-supplier even if the latter has a lower average cost. Second, reducing the cost uncertainty or improving the signal accuracy of the U-supplier does not necessarily make it more attractive to sourcing firms, which cautions the suppliers when making efforts to mitigate cost uncertainty or improve cost estimation. Third, higher competition intensity leads the diversified sourcing strategy to be more likely adopted under certain conditions. Interestingly, increasing the cost of the C-supplier (e.g., a cost hike in China) may make both sourcing firms better off because it can lead to a new sourcing equilibrium. Finally, this paper shows that the direction of quantity distortion under the optimal competitive mechanism differs from that under the traditional monopolistic setting.