Document Type


Publication Date



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 potential suppliers. We examine the value of competition as a mechanism for the buyer to elicit service quality from the suppliers. We compare two approaches the buyer could use to orchestrate this competition: (1) a Supplier-Allocation (SA) approach, which allocates a proportion of demand to each supplier with the proportion allocated to a supplier increasing in the quality of service the supplier promises to offer, and (2) a Supplier-Selection (SS) approach, which allocates all demand to one supplier with the probability that a particular supplier is selected increasing in the quality of service to which the supplier commits. In both cases, suppliers incur a cost whenever they receive a positive portion of demand, with this cost increasing in the quality of service they offer and the demand they receive. The analysis reveals that (a) a buyer could indeed orchestrate a competition among potential suppliers to promote service quality, (b) under identical allocation functions, the existence of a demand-independent service cost gives a distinct advantage to SS type competitions, in terms of higher service quality for the buyer and higher expected profit for the supplier, (c) the relative advantage of SS versus SA depends on the magnitude of demand-independent versus demand-dependent service costs, (d) in the presence of a demand-independent service cost, a buyer should limit the number of competing suppliers under SA competition but impose no such limits under SS competition, and (e) a buyer can induce suppliers to provide higher service levels by selecting an appropriate allocation function. We illustrate the impact of these results through three example applications.


Pre-published version. Final version published in Management Science, February 2007, vol. 53 no. 2 241-259:


Management Science


To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.