Bidding for Contests

• Main Author: SESHADRI, Sudhi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1995
• Subjects: Business; Operations and Supply Chain Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1104; https://doi.org/10.1287/mnsc.41.4.561
• Institution: Singapore Management University

The procurement of product development and production services brings special strategic considerations to the buyer-seller relationship in industrial and institutional market. Multiple sourcing, in particular dual sourcing, is a likely way of dealing with the increased risks faced by buyers. However, there is lack of dual sourcing models that analyze the selection and control process in an integrated fashion. The strategic issues for a cost containment between 2 suppliers are modeled. The suppliers are drawn from several vendors who participate in a bidding competition. The supplier with the lower final cost in the contest wins a larger share of the pooled profit fee. Propositions are derived for the optimal cost-plus contest, and comparisons are made with the common incentive contract for the integrated selection and control model.