Timing the Price Agreement in High‐tech Component Procurement

Abstract

We consider a high-technology supply chain wherein a manufacturer is sourcing a new component from a monopolistic supplier who has limited production capacity. We focus on a setting wherein the manufacturer has decided to adopt the component but has not introduced the end product to the market and the manufacturer’s task is to negotiate with the supplier for the procurement price before a deadline. The only uncertainty is the number of manufacturers adopting this component, which determines the supplier’s outside option. With this uncertainty, delaying the agreement could be preferable because the manufacturer may receive a price cut if the supplier’s outside option turns out to be weak. However, delay could also be costly as the supplier may refuse to sell or ask for a high price if many adopters show up. Thus, the timing of agreement for the manufacturer is a trade-off between the benefit of collecting more information and the risk of losing the limited supply (or paying a high price). Given that the firms are rational, information is symmetric, and the manufacturer’s outside option is to use older technologies, we derive the manufacturer’s optimal timing strategy—how to set the deadline and whether to delay the agreement. Interestingly, we find that the manufacturer can benefit more from waiting when there is a greater chance that other higher-value buyers exist. Furthermore, in certain circumstances, we find that the manufacturer should commit to a tighter deadline, even though it is optimal to delay the agreement.