Why information technology hasn't increased the optimal number of suppliers

Abstract

The authors present a model that shows how a buyer can increase his suppliers' incentives to invest in quality by decreasing their number. This makes it more difficult for the buyer to threaten to switch to alternative sources and thereby expropriate the supplier's share of the value created. As a result, suppliers are more willing to make 'noncontractible' investments in quality. Thus, it is argued that, because information technology often increases the importance of quality, it can lead firms to use fewer suppliers, and that this will be true even when search and coordination costs are very low. Evidence from several empirical studies of buyer-supplier relationships appears to be consistent with this explanation.>

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