Published Online:https://doi.org/10.1287/mnsc.1120.1697

This paper studies an upstream supplier who quotes prices for a key component to multiple sellers that compete for an end-buyer's indivisible contract. At most one of the supplier's quotes may result in downstream contracting and hence produce revenue for her. We characterize the supplier's optimal price-quoting strategies and show that she will use one of two possible types of strategies, with her choice depending on the sellers' profit potentials relative to their uncertainties: secure, whereby she will always have business; or risky, whereby she may not have business. Addressing potential fairness concerns, we also study price-quoting strategies in which all sellers receive equal quotes. Finally, we show that the supplier's optimal mechanism resembles auctioning a single quote among the sellers. This paper can assist upstream suppliers in their pricing decisions and provides general insights into multitier supply chains' pricing dynamics.

This paper was accepted by Martin Lariviere, operations management.

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