TY - JOUR
T1 - Investment Efforts under Complementary Sourcing
T2 - The Role of Market Risk and Endogenous Pricing
AU - Wang, Yimin
AU - Yin, Rui
AU - Chen, Xiangjing
AU - Webster, Scott
N1 - Funding Information:
Funding: The first author acknowledges partial support from the Dean’s Summer Research Grant (2020) at the W.P. Carey School of Business, Arizona State University. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.1096.
Publisher Copyright:
© 2022 INFORMS.
PY - 2022/9
Y1 - 2022/9
N2 - Problem definition: Complementary sourcing, with which a product depends on both a supplier’s and a manufacturer’s engineering and production efforts, is ubiquitous in modern supply chains. A unique feature of complementary sourcing is that efforts by one party enhance the marginal value of the other party’s efforts. Whereas this positive spillover effect can benefit both parties, it is well-established in the literature that it paradoxically induces a first-mover disadvantage; neither party is willing to exert efforts ex ante, resulting in significant lost opportunities for improving sourcing performance. The question we consider in this paper is whether the first-mover disadvantage is a valid concern in more realistic sourcing environments in which the market is risky and price is endogenous. Methodology/results: We analyze a sequential-investment model and investigate how market risk and endogenous pricing affect the first-mover disadvantage. In the presence of market risk, the first mover may face greater market uncertainty than the second mover and, thus, is at an apparent disadvantage. Surprisingly, we find the introduction of market risk can favor the first mover. In effect, the presence of market risk weakens the second mover’s ability to free ride on the first mover’s investment, which increases the leverage of the first mover. This finding persists with exogenous pricing even if the first mover has weak power. Managerial implications: Our results suggest that the first-mover disadvantage identified in the extant literature ignores the operational aspect of practical sourcing environments, and sourcing managers should recognize that advance effort investment is often beneficial in more realistic complementary sourcing environments.
AB - Problem definition: Complementary sourcing, with which a product depends on both a supplier’s and a manufacturer’s engineering and production efforts, is ubiquitous in modern supply chains. A unique feature of complementary sourcing is that efforts by one party enhance the marginal value of the other party’s efforts. Whereas this positive spillover effect can benefit both parties, it is well-established in the literature that it paradoxically induces a first-mover disadvantage; neither party is willing to exert efforts ex ante, resulting in significant lost opportunities for improving sourcing performance. The question we consider in this paper is whether the first-mover disadvantage is a valid concern in more realistic sourcing environments in which the market is risky and price is endogenous. Methodology/results: We analyze a sequential-investment model and investigate how market risk and endogenous pricing affect the first-mover disadvantage. In the presence of market risk, the first mover may face greater market uncertainty than the second mover and, thus, is at an apparent disadvantage. Surprisingly, we find the introduction of market risk can favor the first mover. In effect, the presence of market risk weakens the second mover’s ability to free ride on the first mover’s investment, which increases the leverage of the first mover. This finding persists with exogenous pricing even if the first mover has weak power. Managerial implications: Our results suggest that the first-mover disadvantage identified in the extant literature ignores the operational aspect of practical sourcing environments, and sourcing managers should recognize that advance effort investment is often beneficial in more realistic complementary sourcing environments.
KW - complementary sourcing
KW - effort investment
KW - market risk
KW - pricing
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U2 - 10.1287/msom.2022.1096
DO - 10.1287/msom.2022.1096
M3 - Article
AN - SCOPUS:85140636809
SN - 1523-4614
VL - 24
SP - 2595
EP - 2610
JO - Manufacturing and Service Operations Management
JF - Manufacturing and Service Operations Management
IS - 5
ER -