Title: Mitigating Supply Uncertainty: The Interplay Between Diversification and Pricing
Abstract:
We study a firm's sourcing decision with one reliable supplier and one unreliable supplier under two price setting scenarios. In the first scenario, the committed pricing scenario, the firm makes the pricing decision before supply uncertainty is resolved. In the second scenario, the responsive pricing scenario, the firm's pricing decision is made after supply uncertainty is resolved. We show that supply diversification and responsive pricing are not necessarily substitutes although they both can help the firm effectively mitigate supply uncertainty. We further characterize the condition under which they are complements. Moreover, we examine the impact of market size, price sensitivity, supplier reliability, and failure rebate on the interplay between these two strategies. The implications are also discussed.
