Impact of contracting sequence on assembly systems with asymmetric production cost information

We study an assembly system wherein one manufacturer purchases components from two suppliers with private production cost information. During the procurement process, the manufacturer can contract the suppliers either simultaneously or sequentially. The main question we address is how the contracting sequence influences the manufacturer’s optimal procurement contract design. We find that the manufacturer’s optimal procurement contract varies with the contracting sequence and the suppliers’ cost structure. Particularly, under simultaneous contracting, the manufacturer will give up disclosing any supplier’s cost if her cost uncertainty is low. Under sequential contracting, the manufacturer always discloses the cost of the first supplier who he contracts with, although he may not disclose the cost of the other supplier when the supplier’s cost uncertainty is intermediate or low. We also identify individual firms’ preferences between different contracting sequences. Particularly, the manufacturer prefers sequential contracting; the first supplier who the manufacturer contracts with under sequential contracting prefers simultaneous contracting; the other supplier prefers either of the two contracting sequences. Additionally, we show that the information rent under simultaneous contracting is higher than that under sequential contracting, while the system generates nearly the same profit under different contracting sequences.