The Hierarchy‐Niche Model for Supply Networks

Contemporary products are usually designed and produced in large inter‐firm supply networks rather than by single firms. However, our understanding of such networks is still limited due to the lack of network‐wide empirical data as well as the complexity and nonlinearity of supply networks. Herein, we introduce a network formation model to extend and generalize the prior empirical studies that have revealed variable hierarchy topologies and firm‐level transaction specificities across the supply networks for automobiles and electronics. We call it the “hierarchy‐niche model.” With tuning the parameters for transaction specificity and transaction breadth, the model can generate a wide spectrum of stochastic networks that comply with the production hierarchy to varied degrees. Our simulation analyses show that the model‐generated stochastic networks capture hierarchical and cyclic topologies of real‐world automobile and electronics supply networks. The model, which relates firm‐level transaction patterns to network‐wide emergent topologies, can be further utilized to inform and guide firms’ transaction strategies concerning the overall supply network.