The Complementary Effects of E-Markets on Existing Supplier - Buyer Relationships in a Supply Chain

E−markets have been established in many industries as a sourcing option for buyers, yet in many situations they are used to complement long−term supplier−buyer relationships rather than replacing them. In this paper, we analyze the complementary role of e−markets when the buyer uses e−markets as an outside option in bargaining with the traditional supplier. The supplier may choose to make a relationship−specific investment to reduce the production cost. Two scenarios are considered: when the quality of e−market o¤ering is the same as the traditional suppliers and when there is e−market quality uncertainty. We find that under a wide range of conditions, the e−market helps to stimulate the suppliers investment and improve the coordination of the existing supply chain. Therefore, the e−market can complement rather than substitute the traditional relationship−based supply chain. In addition, our result shows that while the buyer always benefits from the e−market option even if the search cost in the e−market is taken into account, the supplier is worse off. When there is quality uncertainty in the e−market offering, two effects of quality uncertainty on e−market adoption are identified, along with the implications for e−market providers who wish to improve e−market adoptions. While better quality on average will increase e−market adoption, it is surprising that increasing quality dispersion of e−market will also help. Published: 2006 URL: http://www.business.uiuc.edu/Working_Papers/papers/06−0111.pdf The Complementary Impacts of e-Markets on Existing Supplier-Buyer Relationships in a Supply Chain