Dynamic Stable Supplier Coalitions and Invariance in Assembly Systems with Commodity Components

Stable alliance structures among critical (monopoly) component suppliers in a decentralized assembly system are somewhat well understood. However, when there are competing suppliers for any particular component, less is known about such alliances. The intent of this paper is to address some of the theoretical issues that pose challenges in analyzing stable supplier coalitions in such assembly systems. We examine a simple assembly system in which suppliers sell n distinct complementary components to a downstream assembler, who faces a price-sensitive deterministic demand. We assume that k of these components have multiple competing suppliers and that the remaining n − k suppliers are monopolists. We analyze alliance/coalition formation between suppliers using a two-stage approach that is common in the literature. When some suppliers face competition, predictions on stable supplier alliances are fraught with technical difficulties; we resolve these by showing an asymptotic invariance result. We use this in Stage 1 of the game to predict the structure of the stable supplier coalitions using a dynamic version of stability that accounts for players’ farsightedness.