Mitigating Supply Disruption: The Interplay between Responsive Pricing and Information Sharing under Dual Sourcing

Abstract

Facing supply disruptions that often occur in business, firms can increase redundancy through supplier diversification and manage demand-side problems through responsive pricing and demand information sharing. We consider a Stackelberg–Nash game consisting of two competing suppliers with heterogeneity in terms of reliability and production cost and a manufacturer, and study the manufacturer’s strategy choice problem. The manufacturer has two strategies, namely responsive pricing and information sharing. The interplay between responsive pricing and information sharing is analyzed by defining the value of responsive pricing. The results of the study show that responsive pricing always benefits the manufacturer. Responsive pricing increases the manufacturer’s incentive to use dual sourcing, whereas the manufacturer with committed pricing will only choose single sourcing. Under responsive pricing, the demand potential and the unreliable supplier’s disruption probability similarly affect the manufacturer’s sourcing decision. As the demand potential or the unreliable supplier’s disruption probability increases, the manufacturer will tend to prefer dual sourcing. When the reliable supplier’s production cost is moderate, the manufacturer with responsive pricing will choose to share demand information, while the opposite is true for the manufacturer with committed pricing. At this point, responsive pricing and information sharing will complement each other.