Strategic decisions under uncertainty: Supplier quality improvement and exit in duopoly

Kim, Youngsoo

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https://hdl.handle.net/2142/101004 Copy

Description

Title

Strategic decisions under uncertainty: Supplier quality improvement and exit in duopoly

Author(s)

Kim, Youngsoo

Issue Date

2018-04-17

Director of Research (if dissertation) or Advisor (if thesis)

Kwon, Dharma

Doctoral Committee Chair(s)

Kwon, Dharma

Committee Member(s)

• Chen, Xin
• Engelbrecht-Wiggans, Richard
• Xu, Yuqian

Department of Study

Business Administration

Discipline

Business Administration

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• decision making under uncertainty
• supply chain management
• quality management
• game theory
• war of attrition

Abstract

This dissertation consists of three interrelated essays on firm-level decision problems when the exterior environment (e.g. product quality or market prospect) is uncertain and there are strategic interactions with other firms (e.g. competitors). The first essay (Chapter 2) studies a buyer’s decision to improve its supplier’s quality when the focal supplier is shared by another buyer who competes in the same market. Each buyer’s investment is a way to outperform the other buyer. However, the investment opportunity comes with spillover risk via the shared supplier. Given this risk-benefit tradeoff, we characterize the conditions under which the optimal timing of the first investment in shared suppliers is earlier (or later) than in sole suppliers. Also, we find that learning moderates the impact of competition and spillover on investment decisions, which suggests that the interplay between learning, spillover, and competition should be carefully examined to build sound investment strategies. The second essay (Chapter 3) also examines buyers’ investment decisions in a buyer-supplier-buyer triad. However, we consider the case when market competition is not an integral part of the problem so that a buyer strives to free-ride on the other buyer’s investment in the shared supplier. Moreover, because the improved quality deteriorates over time by organizational forgetting, buyers should make such an investment decision repeatedly. This problem is thus a repeated free-rider problem. The main finding of this essay is that each buyer delays its investment in the hope of free-riding on the other only if the game is repeated and there is a unique equilibrium entailing inefficient delays. Due to this uniqueness of the equilibrium, we are able to construct the well-defined measure for the inefficiency from free-riding incentives and estimate this inefficiency by using primary data from a field study of an automotive manufacturer. The results from this estimation indicate that the inefficiency can be substantial although it greatly varies depending on the supplier sectors. The third essay (Chapter 4) investigates firms’ exit decision problems under uncertainty by employing the similar mathematical framework used in the second essay: The first firm to exit the market concedes the monopolist’s profit to the remaining firm. The extant literature in economics has predicted that the firms stay in the market longer than necessary. We revisit this problem with two realistic perturbations – firms are asymmetric in their exit barriers and the market evolves stochastically. In contrast to the findings of the previous literature, we find that this perturbed model does not admit an MPE (Markov perfect equilibrium) resulting in inefficient (i.e. longer than necessary) stays. Therefore, this asserts the instability of an equilibrium with inefficient stays, which provides a novel rationale for selecting an equilibrium over the others.

Graduation Semester

2018-05

Type of Resource

text

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Copyright and License Information

Copyright 2018 Youngsoo Kim

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