Sourcing and pricing decisions under upstream competition with a financially distressed supplier, endogenous bankruptcy risk, and a backup supply option

Andreas K. Gernert, David A. Wuttke, H. Sebastian Heese

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

To maintain future supplier competition, manufacturers may support financially distressed suppliers by sourcing from them, even if they are less efficient than competitors, and by procuring larger quantities from them at higher prices. We analyze these strategies in a model in which a manufacturer decides for one of two available suppliers, supplier bankruptcy risk is endogenous, and financial distress can lead to internal or external reorganization. Following bankruptcy, the remaining supplier may serve as a backup option. Our research identifies settings in which the manufacturer should support the distressed supplier. We also find that in some cases, a nondistressed supplier may charge price premiums due to its competitor's distress, while in other cases, it may use predatory pricing to drive its competitor into bankruptcy. We complement our results with a small case study and show how our model can explain patterns observed in industry.

Original languageEnglish
Pages (from-to)2475-2490
Number of pages16
JournalProduction and Operations Management
Volume32
Issue number8
DOIs
StatePublished - Aug 2023
Externally publishedYes

Keywords

  • backup supply
  • endogenous bankruptcy risk
  • finance and operations interface
  • financial distress
  • supplier selection
  • supply chain risk management

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