More Patience under Bigger Threats? Agreement Timing in High-Tech Component Procurement

Abstract

We study price negotiations in high-technology supply chains where a manufacturer is sourcing a new-technology-based component from a supplier who has limited production capacity. The firms are rational and information is symmetric. It is unknown whether demand for this component will exceed capacity, in which case the supplier would prefer to satisfy high value buyers. In this setting, an immediate agreement could be inefficient for both the manufacturer and supplier because they may improve their expected payoffs by delaying the agreement and learning about the market prospect of the component. But delay could also be costly as the manufacturer must reach an agreement before launching its end product with the new component. In absence of an agreement, the manufacturer will have to continue using older technologies. In this negotiation we are interested in helping the manufacturer formulate its timing strategy — how to set the deadline and whether to delay an agreement. We derive conditions under which delay increases channel payoffs. Interestingly, we find that the manufacturer can benefit more from waiting when there is a greater chance that the supplier will walk away to satisfy other higher-value buyers. Furthermore, in certain circumstances, we find that the manufacturer should commit to a tighter deadline, even though it is optimal to delay the agreement.