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Proseminar/Job Talk – Youngsoo Kim
November 10, 2017 @ 1:15 pm - 2:45 pm
Strategic Investment in Shared Suppliers with Quality Deterioration
Abstract: Manufacturers often invest in their suppliers to improve the quality of supplied goods, but these suppliers are often shared by other manufacturers who also consider investing in them. Motivated by this industry context, we examine a two-firm game of investment where one firm can free-ride on the other firm’s investment. Facing a continued deterioration in the supplier’s quality due to organizational forgetting, each firm repeatedly decides when to invest in the supplier’s quality. The resulting game is a repeated stochastic war of attrition. We find that the spillover and the repetitive nature of the investment opportunities induce a mixed strategy equilibrium leading to inefficient delays in investment. We then compare the inefficient equilibrium to the first-best solution and illustrate the resulting efficiency loss by using primary data collected from a field study. We conclude that coordination among the firms or divisions can potentially save substantial amount of money.
Youngsoo Kim, Ph.D. Candidate
Department of Business Administration
University of Illinois at Urbana-Champaign