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Conference Proceeding

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In this paper, we consider a single buyer who wishes to outsource a fixed demand for a manufactured good or service at a fixed price to a set of N suppliers. We examine the value of competition as a mechanism for the buyer to elicit good service quality from her suppliers. In particular, we consider a scheme in which the buyer allocates a proportion of demand to each supplier, with the proportion a supplier receives increasing in the service level she offers. Suppliers compete for expected market share, which increases in the offered service level. The suppliers affect their service levels by exerting effort once they receive a positive portion of demand, with the cost of effort increasing in the service level offered and the demand allocated. Each supplier chooses a service level to maximize her own expected profit, subject to the behavior of other competing suppliers. In making this decision, the supplier effectively weighs the market share benefits of each service level against its associated cost. The possibility of inducing service quality through competition raises several important questions. For example, under what conditions does service competition lead to an equilibrium? How does the number and type of suppliers affect the buyer’s service quality and the suppliers’ expected profits? Is it more desirable for the buyer to contract with suppliers that are equally efficient or to have a mix of suppliers with varying capabilities? How should the buyer choose parameters for the competition to maximize the quality of service she receives? In particular, what is the impact of the allocation functions on the buyer’s quality of service and is it possible for the buyer to choose an allocation function that forces the suppliers to provide the maximum feasible service level? In this paper, we address these and other related questions.


Presented at M&SOM 2006 Conference Atlanta, Georgia.



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