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Responsible Sourcing under Asymmetric Information: Price Signaling versus Supplier Disclosure

Journal(s): Decision Sciences
Published: October 1, 2020
Author(s): Lusheng Shao, Jennifer K. Ryan, Daewon Sun

General Description
Given the growing number of socially conscious consumers, firms are increasingly concerned with sourcing from responsible suppliers. However, a firm’s suppliers are not always apparent to consumers. Therefore, we investigate two methods, price signaling and disclosure, which a firm can use to communicate its supplier selection to consumers. Motivated by the observation that some firms have begun to disclose their supplier information, including publishing lists of their suppliers, we consider a setting in which the firm may voluntarily disclose that information, but at a cost. We find that, when a firm must rely only on price to signal its responsible sourcing practices, and does not have the opportunity to disclose its supplier information, the firm may have an incentive to source from a less responsible supplier. However, if supplier disclosure is an option, the firm will choose to source responsibly if the disclosure cost is small and if a sufficient percentage of consumers are socially conscious. Our findings highlight the importance of transparency and socially conscious consumption in driving responsible sourcing.

Academic Abstract
Given the growth in socially conscious consumption, firms are increasingly concerned with sourcing from responsible suppliers. However, a firm's sourcing decisions are not always apparent to consumers. Therefore, we investigate two mechanisms, signaling and disclosure, which a firm can use to communicate its sourcing decisions to consumers in a setting where only some consumers care about the firm's sourcing practices. We develop a supplier selection model with an embedded game in which the firm signals its supplier choice through price. Then, motivated by the observation that some firms have begun to disclose their supplier information, we consider a model in which the firm may voluntarily disclose information, but at a cost. We find that, under signaling alone, a firm which sources from a more responsible supplier may distort its price upward to signal its responsible sourcing. This leads to reduced profit, implying that the firm may have an incentive to source from a less responsible supplier. However, if supplier disclosure is an option, the firm will choose to source responsibly if the disclosure cost is small and the proportion of socially conscious consumers is large. Our findings highlight the importance of transparency and socially conscious consumption in driving responsible sourcing.

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