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Cooperation among suppliers of complementary products in repeated interactions

Author

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  • He, Yong
  • Zhao, Xuan
  • Krishnan, Harish
  • Jin, Shibo

Abstract

Sustaining collaboration among independent firms is a central problem in supply chain management. While contractual agreements are commonly used to achieve coordination, firms often rely on relational or trust-based approaches to achieve collaboration. This paper examines how suppliers of complementary products sustain cooperation via repeated interactions in a supply chain. This topic is relevant to digital supply chains as there has been a rapid growth of digital platforms where independent firms can share data or collaborate in other ways to achieve greater efficiency. We consider a specific setting to explore how firms can achieve collaboration without explicit contracts. In our model, suppliers sell complementary products to a downstream buyer (or assembler) who faces uncertain demand. We model three cases where suppliers have different levels of forgiveness towards deviations: the Nash reversion strategy (terminate the relationship forever), the finite-punishment-period strategy (pause the relationship for a finite time), and the repentance strategy (continue the cooperation after making amends). When both suppliers value future business relationship (the future cash flow), then supplier cooperation will be an outcome of subgame-perfect equilibrium. In addition, suppliers with a moderate tolerance for deviation can reach a long-term cooperation by the repentance strategy, while the Nash reversion strategy and the finite-punishment-period strategy can help sustain the long-term cooperation between suppliers with a low tolerance. We show that the repentance strategy, rather than the other two strategies, is strongly renegotiation-proof. Our results show that long-lasting business relationships in a supply chain can be more easily sustained as an equilibrium when partners are willing to continue to work with others who may have deviated from their commitment, as long as the deviating partner accepts a punishment (through a temporary pause in the relationship) or the partner makes amends. Moreover, the repentance strategy can effectively reduce the negative effect of deviations on the supply chain.

Suggested Citation

  • He, Yong & Zhao, Xuan & Krishnan, Harish & Jin, Shibo, 2022. "Cooperation among suppliers of complementary products in repeated interactions," International Journal of Production Economics, Elsevier, vol. 252(C).
    • Handle: RePEc:eee:proeco:v:252:y:2022:i:c:s0925527322001529
    DOI: 10.1016/j.ijpe.2022.108559
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