Stability of Procurement Networks

Problem definition: Given an observed procurement network, we characterize when the network structure is rationalizable as pairwise stable—that there exist preferences such that no pairs of buyers and suppliers would deviate from the existing network structure. Methodology/results: We show that the Weak Axiom of Revealed Pairwise Stability (WARPS) is a necessary and sufficient testable condition for pairwise stability. WARPS is an algorithm that checks whether a link can be added to the network to create pairs of isomorphic nodes, and we show this to be theoretically equivalent to checking for cycles in revealed preference relations. Based on our theoretical derivation, we introduce a novel network instability metric that measures the extent to which procurement relationships are pairwise stable. In an empirical illustration, we calculate our network instability metric for public procurement networks of the European Union. Managerial implications: By calculating our proposed network instability metric, which requires only a single snapshot of a network as data, agents such as firms and government agencies can quantify and manage their exposure to endogenous risks—risks due to the endogenous changes in the network structure of procurement relationships.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.0925.