Price Quoting Strategies of a Tier-Two Supplier

This paper studies the price-quoting strategies used by a tier-two supplier, whose tier-one customers compete for an OEM’s indivisible contract. At most one of the tier-two supplier’s quotes will ultimately result in downstream contracting and hence produce revenue for her. We characterize the tier-two supplier’s optimal price-quoting strategies and show that she will use one of two possible types of strategies, with her choice depending on the tier-one suppliers’ profit potentials: secure, whereby she will always have business; or risky, whereby she may not have business. Addressing potential fairness concerns, we also study pricequoting strategies in which all tier-one suppliers receive equal quotes. Finally, we show that a tier-two supplier’s optimal mechanism resembles auctioning a single quote among the tierone suppliers. This paper can assist tier-two suppliers in their pricing decisions, and provides general insights into multi-tier supply chains’ pricing dynamics.