Supply Competition under Quality Scores: Motivations, Information Sharing and Credibility
Authors: Hedayat Alibeiki, Mehmet Gumus
Publication: International Journal of Production Economics, Forthcoming
Non-price attributes such as product quality, supplier's reliability, and timely delivery can be more important than simply unit price for the buyers. Therefore, the form of supplier competition in which the buyer adjust the prices from the suppliers with the quality scores (QS) becomes more popular than that under price-only format, where the decision is made solely based on prices. That said, QS alters the competition between the suppliers in two ways. First, it changes the nature of price competition among the suppliers as the winner needs to offer the lowest QS-adjusted price (not necessarily the lowest price). Second, the specific value of QS for each supplier is only known to the buyer, which gives rise to the credibility issues from the buyer's perspective. Analyzing supply competition under QS, in this paper, we characterize the equilibrium prices and evaluate whether or not it is beneficial for the buyer to share QS information with the suppliers in a credible fashion. We identify two factors: (i) degree of homogeneity among the suppliers (as measured by relative QS between the suppliers) and (ii) degree of information asymmetry (as measured by the range of uncertainty for the relative QS). The buyer prefers not to share the relative QS with the suppliers if they are relatively similar to each other in terms of QS. This is because the suppliers engage in a more intensified price competition under information asymmetry compared to when they have access to exact value of the relative QS. However, the opposite holds true if the suppliers become more uncertain about their relative QS. Hence, in this case, the buyer finds sharing QS information with the suppliers beneficial for the sake of lowering equilibrium prices notwithstanding the cost of credible sharing.