A Supplier Switching Model With the Competitive Reactions and Economies of Scale Effects

To minimize costs, a buying firm would seek sources which offer a more affordable price for the required products. On the basis of a principal-agent framework, this paper presents a buyer's supplier switching model under asymmetric information to minimize the buying cost considering the volume-dependent switching cost, the competitive reactions and economies of scale effects of the incumbent supplier. The proposed model is first converted into an optimal control problem. Then the optimal supplier switching strategy and the corresponding transfer payment are obtained by virtue of Pontryagin's maximum principle. It is shown that the switching cost components and competitive reactions have significant impacts on the switching decision. Only if the maximum price discount is greater than the fixed component of the switching cost, there may exist a partial switching strategy for the buyer to benefit from the competitive effects. Otherwise, the buyer should take an all-or-nothing switching strategy or no switching strategy. Some managerial implications for sourcing strategies with respect to the competitive reactions and economies of scale effects are provided. Furthermore, we propose a revenue sharing contract to highlight the advantage of the contract designed based on the principle-agent theory. Finally, we employ numerical examples to account for the proposed methods.